After a torrid start to 2013, the U.S. stock market has hit a rocky patch in recent weeks. The S&P 500 topped out just below the 1,600 level on April 11 before concerns about global growth rates triggered a rise in volatility and sent the S&P skidding back below the 1,550 level. At this point, it would seem premature for investors to bail out of equities completely, but it may be time to rotate out of riskier sectors and into more conservative stocks.
Although market timing can be extremely difficult, investors generally want to have exposure to cyclical areas of the economy when growth is picking up and the stock market is on solid footing. Conversely, when volatility rises and the market appears to be on precarious ground, more conservative sectors such as consumer staples and utilities tend to outperform.
One of the primary catalysts for the most recent sell-off was a Chinese GDP report that showed that growth in the country is tracking below economists’ estimates. A number of other economic reports have also showed that the domestic economy may be hitting a soft patch. Although the losses are relatively minor at this point, experienced investors are all too familiar with the phenomenon of stock prices falling much faster than they go up.
It is not inconceivable that all of the year’s gains could evaporate in a matter of weeks amid an accelerating downturn. For this reason, it could be a good time to access your portfolio and sell some riskier cyclical stocks for leading consumer staples names that operate conservative businesses and pay a healthy dividend.
Below, I examine three consumer staples stocks that have a number of properties that make them attractive to investors who are looking to adopt a more defensive posture. Specifically, all of these companies operate large, established businesses with market caps in excess of $10 billion. All three companies have also grown earnings per share and revenue by at least 5% over the last five years, and each of the stocks is yielding over 3%.
General Mills, Inc. (NYSE:GIS) – Despite being a conservative stock that tends to outperform during market corrections, this food conglomerate has been on fire in recent months. The stock has staged a powerful breakout from the $40 level and is up almost 29% over the last year, including a better than 23% gain in 2013. Although the stock’s valuation is hardly cheap at 17 times forward estimates, a sharp jump in revenue for fiscal 2012 suggests that the business may be set to accelerate in coming years.
General Mills, Inc. (NYSE:GIS) owns a myriad of leading brands that underpin the company’s reliable, steady business. These include Cheerios, Wheaties, Betty Crocker, Yoplait, and Progresso, among others. Investors should also find the stock’s better than 3% dividend attractive amid the current low interest rate environment.
Lorillard Inc. (NYSE:LO) – This cigarette manufacturer sells a number of discount brands, including Maverick and Kent, along with its flagship Newport brand of cigarettes. Although there may be some ethical considerations that go along with investing in cigarette companies, the sector has offered investors a terrific mix of growth and yield in recent years. Although Lorillard Inc. (NYSE:LO) has been underperforming the market over the last year, notching a loss of around 11%, the stock has been a long-term winner.
Investors will likely find the company’s track record of revenue growth and the stock’s better than 5% dividend yield very attractive. Valuation also appears reasonable as Lorillard Inc. (NYSE:LO) trades at a forward P/E ratio of roughly 12, which is less than both the S&P 500 and the cigarette industry as a whole. If volatility expectations continue to rise and the market downturn accelerates, don’t be surprised if Lorillard Inc. (NYSE:LO) actually rises on safe-haven flows.
Over the last 52-weeks shares are up almost 32%, including a roughly 9% gain in 2013. At current levels, the stock is trading at around 18 times next year’s earnings estimates. Given Unilever plc (ADR) (NYSE:UL)‘s high-quality defensive business and history of top-line growth, this valuation would appear fair. The stock also benefits from a generous 3% dividend yield, which should provide price support in the event of a market sell-off.
The overall outlook for the U.S. stock market continues to appear favorable, but frequently large corrections appear to be harmless at the outset. Although it is too early to determine if recent stock market gyrations and softening economic reports are the beginning of a larger downturn, investors who are sitting on large profits may want to adopt a more conservative posture.
One of the best places to look for companies that operate safe and reliable businesses and stocks that are offering large dividend yields is the consumer staples sector. Investors who are looking to rotate out of riskier equities and into high-yielding, less volatile names may find attractive opportunities in General Mills, Lorillard Inc. (NYSE:LO) and Unilever.
The article Is it Time to Rotate Out of Cyclicals and Into Staples? originally appeared on Fool.com is written by Ryan Glosier.
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