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Add Diversity To Your Consumer Staples Basket

Posted: Nov 19, 2008 13:22 PM by Gregory S. Davis

Tickers in this Article: XLP, VDC, CLX, PG, CHD

Laundry detergent, toothpaste and deodorant find their way into most shoppers carts during even the worst economic slowdowns. That's why companies that make these consumer staples are seen as a safe haven during a recession. Church & Dwight Co (NYSE:CHD) competes with the likes of Procter & Gamble (NYSE:PG) and Clorox (NYSE:CLX) to deliver quality products to consumers. (To learn more about this subset of stocks, read A Guide To Consumer Staples.)

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P&G the Staple Consumer-Staple Stock
Any discussion of consumers staples is likely to include mention of Procter & Gamble and rightfully so. The $85 billion consumer product giant is the home of familiar names like Duracell batteries, Tide laundry detergent and Pampers diapers. Both the Vanguard Consumer Staples ETF (AMEX:VDC) and the larger, in terms of assets, Consumer Staples Select Sector SPDR ETF (AMEX:XLP) listed Procter & Gamble as their top holding as of Oct. 31 and Sept. 30 respectively.

Compliment to P&G
A less obvious choice to consider is the $2.36 billion Church & Dwight. Church & Dwight is home of the Arm & Hammer line of products along with familiar names like Nair hair removal cream, Arrid deodorant and First Response home pregnancy tests. Over the past three years ending Nov.18, 2008, Church & Dwight stock has returned 74.7% while the perhaps more well known Procter & Gamble and Clorox returned 16.5% and 18.6% respectively.

Eying Volatility
Besides the different brands and range of products the consumer staples companies offer, investors should also note their difference in beta. Beta measures volatility. The beta of a stock is given in relation to a broad index like the S&P 500. A beta of 1 suggests that if the S&P goes up 10% the stock will do the same. A beta of 0.5 suggests that if the S&P drops 10% then the stock will only fall 5%.

Beta in Action
Procter & Gamble has a beta of 0.49 while Church & Dwight's is 0.25 as of Nov. 18. The lower the beta the less correlated a stock is to the movements of a related index like the S&P 500. The beta measurement can help investors add non-correlated assets to their portfolios. Over the past challenging 12-months Church & Dwight, with its lower beta, has returned 2.4% while Procter & Gamble returned -13.4% through Nov. 18. The S&P 500 is down 40% during the same time period.

What This Means to Investors
Investors sitting on the sidelines or attempting to bottom fish for financials should note that the XLP fund has outperformed the S&P 500 by 11.99% and 5.99% over the past three-year and five-year periods, respectively. While past performance is not an indicator of future returns, estimates of a growing U.S. and world population by the U.S. Census bureau suggest that the demand for the household items offered by the likes of Procter & Gamble and Church & Dwight may increase over time.

By Gregory S. Davis

Gregory S. Davis is the owner of G. Davis Capital, a Registered Investment Advisor with the state of North Carolina dedicated to providing independent investment research and education. His core methodology for choosing investments includes going against emotion eliciting headlines while focusing on asset diversification. G. Davis Capital also publishes the ETF education website, ETFReady.com . Gregory is a graduate of the Wharton School of Business and he has received an MBA from Bowie State University.

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