It was reported that Warren Buffet had recently sold down on consumer stocks after being disappointed by their performance. In a regulatory filing dated August 3, Berkshire is reporting about a 21% reduction in the amount of consumer products stocks it holds, even as it ups its exposure to banking, insurance, and industrial stocks. For more, go here.
Unlike the US consumer stocks, the performance of the top flight consumer stocks listed on Bursa Malaysia has been anything but disappointing. Just look at the 5 charts below. In term of financial performance, they also did not disappoint. So, should we just ignore the action taken by the Oracle of Omaha?
I have tabulated the value of the 5 top performing consumer stocks below. The valuation of these stocks are quite rich, with PE multiple ranging from 22 times to 30 times. One possible justification for buying or holding these stocks is that the growth rate is high. Looking at the table, you will see that the growth rate is respectable for Carlsberg & Nestle at 16-17% and the outlier is Dutch Lady. (Note: We can ignore F&N because of its current problems which I had dealt with in a separate post). Dutch Lady's substantially higher profit dates back to 1Q2011 when it had a successful relaunch of its growing up milk. Can Dutch Lady continue its high growth?
Table: Consumer stocks valuation
Investors should not only concern themselves with PE ratio but also look at PEG ratio. The difference between these two ratios are:
P/E = Price per share / Earnings per share(Note: The growth rate in the table above is arrived at by comparing the EPS for the last 4 quarters with the preceding 4 quarters' EPS).
PEG = (P/E) / Annual earnings-per-share growth
As a rule, investors should seek out stocks with PEG ratios closer to 1 and avoid stocks with PEG ratios closer to 2. Based on this rule, the only stock that is relatively attractive is Dutch Lady while Carlsberg & Nestle (with PEG ratio at 1.8-2.0 times) & Guinness (with PEG ratio at 3 times) are deemed pricey. If Dutch Lady's current year growth were to slip to a more sustainable level (say 15%), its PEG ratio would be bumped up (to 1.6 times). While Dutch Lady would not be deemed expensive, it would no longer be deemed cheap.
Based on the above, I think it is advisable that we too should consider taking some profit on our high-flying consumer stocks- not because of their poor performance but because they are fully valued.
Chart 1: Carlsbg's monthly chart as at Aug 7, 2012 (Source: Tradesignum)
Chart 2: Dlady's monthly chart as at Aug 7, 2012 (Source: Tradesignum)
Chart 3: F&N's monthly chart as at Aug 7, 2012 (Source: Tradesignum)
Chart 4: GAB's monthly chart as at Aug 7, 2012 (Source: Tradesignum)
Chart 5: Nestle's monthly chart as at Aug 7, 2012 (Source: Tradesignum)