One might say that, 2015 was the year of the flashy investment. Amazon’s drones lead the headlines and the high flying FANG stocks — Facebook, Amazon, Netflix and Google — soared higher, all returning more than 30%. This year is shaping up to be a different story, as the S&P 500 has had one of its worst starts ever. Some of the high flyers from last year have come crashing back to earth, while plain-wrapper investments like consumer staples and utilities have shown resilience in this volatile market. Will 2016 turn out to be the year of the Kleenex®?
You may have never heard of Kimberly-Clark Corporation KMB, but you have certainly heard of or used their products. Kimberly-Clark is a personal-care corporation located in Irvin, Texas, that specializes in paper-based consumer products. Their primary brands include Kleenex facial tissues, Scott toilet paper, Kotex feminine hygiene products, and Huggies disposable diapers. Kimberly-Clark produces products that are needed even when the economy turns negative, which makes this a great company to own in a down market. …
Protection in a correction
The biggest benefit of owning Kimberly-Clark is the protection that it provides in a volatile and down stock market. Consumer-staples stocks are known to be lower-beta stocks that tend to thrive in these conditions. The chart below shows recent 10% market pullbacks since 2010 and how Kimberly-Clark has performed compared to the S&P 500.Kimberly-Clark has been very resilient in recent market corrections, and we expect similar performance in future stock market pullbacks.
Despite all of the positives, there are still risks in purchasing a stock that has done as well as KMB has recently. The run-up has made the stock relatively expensive compared to the overall market. The forward P/E of 21 is almost 25% more expensive than the market. Kimberly-Clark is a multi-national company, and the strength of the dollar has been a big strain on their earnings. The strong dollar decreased revenue by 11% in the most recent earnings report. For a low-margin business, this revenue decline is a huge headwind that is difficult to overcome and one of the reasons revenue came in much lighter than analysts’ expectations. If the Federal Reserve continues to hike rates this year, the dollar could strengthen even more. ...
A good defense
Owning a company that makes facial tissue and diapers may not make you rich quickly, but it will help shield your portfolio in times like these in which defensive positions thrive. Still, you may want to consider waiting for a pull-back in KMB before buying, as it is expensive compared to its long-term average valuation. There is a saying in sports: Defense wins championships (See: Denver Broncos, Super Bowl 50), and this year we are seeing that defensive stocks can help your portfolio win.