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Benefit From The Inevitable

Posted: Mar 07, 2008 11:03 AM by Will Ashworth

Tickers in this Article: FDP, K, WWY, BUD, MCD, GIS, PEP, PBJ

Food and drink: two things we just can't live without. When tough economic times arrive, these two items stay in the budget while others disappear. It's a matter of priorities for most, and consumer staples almost always come out at the top of the list.

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In recent months, there has been increasing focus on the possibility of an impending food shortage. This would force prices upward as supply diminishes and demand continues unabated. In similar fashion to rising oil prices, most will grin and bear it. Gas retailers have been very quick to pass on any increases in costs and most food and beverage manufacturers now face the same dilemma. Grocers can only absorb these increases for so long. The buck will eventually pass to the consumer. (For more on the effects a food shortage could have on the market, see Starvation's Wages.)

The Best Offense is a Good Defense
In the first two months of the year, stocks are broadly down, with the Dow Jones Wilshire 5000 declining 10% so far in 2008. It's no secret we're in a difficult investment environment. Some pundits suggest going defensive in 2008, either by sitting on the sidelines in cash or taking positions in companies not as likely to be hurt by economic recession.

Those that choose the latter option must decipher which companies fit this criterion. As mentioned earlier, consumer staples tend to do well in poor economic conditions, and thus, are an obvious place to start looking. In addition to the defensive nature of their businesses, some of these companies are among the ranks of the large-cap giants of the market, giving their investors safety through both the type and size of their business model.

Some of the top defensive names include Pepsi (NYSE:PEP), General Mills (NYSE:GIS), Anheuser Busch (NYSE:BUD) and McDonald's (NYSE:MCD). Each is well known and likely able to absorb even the most punishing economic blows. Their performance at a time when the markets are swooning is commendable. However, while purchasing any of these individual stocks would be a reasonable move, investors might do even better by buying a particular ETF that trades on the American Stock Exchange. (For other examples of bear-proof stocks, see Guard Your Portfolio With Defensive Stocks.)

Power Shares Dynamic Food & Beverage Portfolio (AMEX:PBJ)
Based on the Dynamic Food & Beverage Intellidex index, this ETF holds the common stock of 30 leading food and beverage companies in the U.S. The average market cap is $19.34 billion, with half of the portfolio represented by large-cap stocks. Less than 15% of the fund's holdings are in small-caps, providing even the most skittish investor with a reasonable level of comfort. Top holdings in addition to the four listed previously include global brands such as Wrigley (NYSE:WWY), Kellogg (NYSE:K) and Fresh Del Monte Produce (NYSE:FDP). It's a who's who of food and beverage.

Year-to-date, it's down 7.1% which might sound bad, but it's a full four percentage points better than the S&P 500. If you look at the five-year comparison (pdf) between the Intellidex index and the S&P 500, you'll notice that both produced annual returns greater than 12%. In fact, they were almost identical. If both were to equal or better the returns of the previous five-year period over the next five years, given the Intellidex index's head start, it's likely to meet or exceed the returns of the S&P 500.

Bottom Line
Where the markets go from here is anyone's guess. What we do know is that it's unlikely any of the major indexes will be above water at the end of 2008. If I'm wrong, that's great. But I doubt I will be. Where does this leave those interested in investing in the Power Shares Food & Beverage Portfolio? My suggestion is to consider dollar-cost averaging for the remainder of the year. If things get worse rather than better, you'll be buying more shares in some great companies.

To get started with this strategy, see Dollar-Cost Averaging Pays and Dollar-Cost Averaging With ETFs.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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