There are no perfect hedges for such a wild market, but there are some places that are historically safer than others, writes Elliott Gue of Personal Finance.
From the ongoing sovereign debt debacle in the EU to weakness in the US economy, macro-level concerns drove the late-summer swoon in global stock markets.
Although it’s impossible to protect your portfolio fully from the market’s short-term gyrations, selling your holdings when fear and panic rules the ticker is a sure-fire way to lose money.
To cushion the blow, make sure that your balanced portfolio includes exposure to safe-haven stocks, and consider shorting likely underperformers with exposure to the weakest parts of the economy.
Don’t dismiss consumer-staples stocks as slow-growth laggards that only outperform when uncertainty makes investors pay up for steady earnings and reliable dividends. The S&P 500 Consumer Staples Index has generated a total return of 87% over the past decade—almost three times the 30% return posted by the S&P 500.
With a beta of 0.56, the sector is only half as volatile as the S&P 500. Solid returns and low risk are an attractive proposition, particularly when you focus on names with exposure to rapidly growing demand in key emerging markets.
Kimberly-Clark Corp (KMB) boasts an impressive portfolio of health and hygiene brands, including Huggies, Kleenex, Cottonelle, Kotex, and Depends.
Although consumers in the US and other developed markets have long trusted and purchased these products, Kimberly-Clark’s growth potential resides in emerging markets, where penetration remains low and domestic demand (along with household income) is on the rise.
In the second quarter, Kimberly-Clark’s revenue surged 8.2% from year-ago levels, with gains in the company’s international segment leading the way. Favorable currency-exchange rates contributed roughly 5% of this revenue increase, while price hikes and organic sales growth accounted for the remaining 3.2%.
Cost inflation remains Kimberly-Clark’s biggest obstacle. In the second quarter, the company’s adjusted gross margin fell 240 basis points to 31.2%, prompting management to raise its estimate of full-year materials costs to between $650 million and $750 million (from $450 million to $550 million).
Thus far, the company has pushed price increases through to customers without endangering its competitive position. In a conference call to discuss second-quarter earnings, management emphasized that the firm has maintained or increased its US market share in six of eight product categories. Sales of certain product lines have also enjoyed above-trend growth in Brazil and China.
To combat higher input costs, Kimberly-Clark continues TO deliver on an efficiency initiative that’s expected to cut costs by $300 million to $350 million in 2011. Meanwhile, the introduction of a line of slip-on diapers and other higher-margin products should limit further erosion of the firm’s profitability.
Yielding more than 4%, shares of Kimberly-Clark rate a buy up to $75 if you’re a long-term investor seeking growth and income. [Shares were trading just above $67 late on Tuesday—Editor.]
Currency Fears Drag Down Swiss Giant
Nestle’s (NSRGY) suite of global brands includes Gerber, Purina, Perrier, and Nescafe.
The Swiss packaged-foods giant posted organic revenue growth of 7.5% in the first half of the year, with price hikes accounting for 2.7% of this gain and real sales growth contributing the remaining 4.8%. Revenue from emerging markets soared 13.3% from the prior year, compared to a 4.4% uptick in mature-market sales.
Despite rising input costs, the firm improved its operating margins by 40 basis points from year-ago levels, as efforts to improve efficiency continued to pay off.
Currency headwinds weighed on the firm’s first-half results. Investors have piled money into the Swiss franc—a traditional safe haven during times of uncertainty—bidding up its value substantially relative to many developed-world currencies.
A higher Swiss franc has an inordinate impact on Nestle’s results, because the firm generates less than 1% of its revenue domestically. This headwind has started to abate as investors’ fear subsides. Buy Nestle up to $65. [Shares cracked $56 on Tuesday, although the recent trend is down—Editor.]
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