Author: Tyler Kocon, Split Rock Private Trading
Covestor model: Equity Rotation
Disclosure: Long GIS
At the end of July we wrote an article entitled “Why consumer staples, and why right now?” (https://investing.interactiveadvisors.com/?p=10843). In that article we discussed how consumer staples can be an attractive place to invest while the markets trade down or sideways. Since we felt at that time that the markets could struggle, at the least over the next few months, we started looking for such plays and began searching for stocks with low betas and decent dividends. One sector that kept popping up in our screens was consumer staples. Once we looked past the technical aspects and focused on the fundamentals, we were convinced that staples were the place to be.
We asked ourselves a very simple question: “what kinds of businesses are best-positioned to withstand an economic slowdown?” Our answer came in many parts but the main theme was evident. No matter what the economy is doing there are certain products that people simply cannot live without, the “staples” of everyday life: cereal, bread, milk, toothpaste, toilet paper, etc. Once we were confident with our thesis, we started sifting through the various consumer staples companies to find the ones that we felt were positioned well to handle the current economic environment.
One company that we really liked, and still really like, is General Mills (NYSE: GIS). We recently toured the General Mills headquarters in Minneapolis, MN and were very impressed with their operations. We were able to “kick the tires” with GIS’s investor relations and gained some valuable insights into GIS and consumer staples as a whole. As a result, our trip basically verified our conclusion about GIS and staples.
So what does all this mean? Well, since July 22 (the most recent peak in the stock market) and until end of day Sept. 12, the S&P 500 has struggled and has produced returns of -13.5% (Google Finance: http://bit.ly/psjuRQ). Consumer staples, as measured by the Consumer Staples Select Sector ETF (XLP), are down much less at only -5.6% (Google Finance: http://bit.ly/n34Qac). General Mills beat them both and is down only -1.72% (Google Finance: http://bit.ly/qLH25h) in the same time period.
If you look at our Covestor model (Split Rock Equity Rotation S:RERX) you’ll see that over the month of August we managed to outperform our benchmark, with a modest positive return of 1.31% while the S&P 500 dropped 5.68%.
Sometimes there is just nowhere to hide from a declining market. If this is the case, finding ways to minimize risk and minimize losses (at the cost of potentially limiting upside in the event of a market surge) is key.
