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As the Federal Reserve transitions from a restrictive monetary policy to a more accommodative stance, investors are questioning how this regime change will impact various asset classes.
The central bank’s shift towards lower interest rates can have far-reaching implications across equities, bonds, and other markets.
Historically, stocks have tended to perform well following the Fed’s initial rate cuts—but with a crucial caveat: the economy must avoid slipping into a recession. An analysis by Goldman Sachs reveals that the S&P 500 has experienced significant declines even after rate cuts if the U.S. economy entered a recession during those periods.
When it comes to bonds, lower interest rates have generally led to a decrease in bond yields, thus driving up bond prices. Unlike equities, this dynamic has historically played out somewhat independently of the economic cycle. However, “what's past is prologue” is not always a guarantee in financial markets.
‘Quality Can Be Found Across Asset Classes’
According to Bank of America’s latest Research Investment Committee (RIC) report, investors can identify quality opportunities across various asset classes, particularly in today’s shifting market landscape.
BofA analysts suggest that in the U.S. equity space, investors should adopt a defensive stance, focusing on companies with high free cash flow.
Savita Subramanian, head of U.S. equity & quantitative strategy at BofA, notes that S&P 500 valuations indicate low price returns for the next decade, making dividend payouts more crucial for total returns.
Outside the U.S., Bank of America is bullish on Japanese equities as effective corporate reforms are expected “to unleash a mountain of cash.” The WisdomTree Japan Hedged Equity ETF is a top pick in this market, having gained 125% since 2019. This ETF also offers protection against the yen’s devaluation.
In the fixed-income market, BofA suggests exposure to AAA-rated collateralized loan obligations (CLOs) and long-dated Treasury bonds.
Asset Class | Name | |
---|---|---|
Equities | ||
Utilities | First Trust Utilities AlphaDEX ETF | |
Utilities | Utilities Select Sector SPDR Fund | |
Real Estate | Real Estate Select Sector SPDR Fund | |
Real estate | iShares Cohen & Steers REIT ETF | |
Consumer staples | Consumer Staples Select Sector SPDR ETF | |
Consumer staples | iShares U.S. Consumer Staples ETF | |
Value | Vanguard Value ETF | |
Quality | Pacer US Cash Cows 100 ETF | |
Dividend | Schwab US Dividend Equity ETF | |
Buybacks | iShares Core Dividend ETF | |
Japan | Wisdom Tree Japan Hedged Equity ETF | |
Fixed income | ||
Credit | Janus Henderson AAA CLO ETF | |
Duration | iShares 20+ Year Treasury Bond ETF |
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The Procter & Gamble Company PG, also known as P&G, has displayed a robust graph, reflecting the continued rise in its share price in the past few months. The PG stock’s momentum is attributed to the success of its strategy focusing on sustainability and adaptability, responding to the evolving demands of consumers, customers and society. It has been focused on productivity and cost-saving plans to boost margins.
In the year-to-date period, the company’s shares have rallied 21%, surpassing the broader Zacks Consumer Staples sector and the S&P 500 index’s rise of 10.4% and 17.9%, respectively.
Shares of this Cincinnati, OH-based consumer goods company created new 52-high marks more than three times in less than three months.
The current share price of $177.24 reflects a 0.4% discount to its recent 52-week high mark of $177.94. Also, the PG stock reflects a 25.3% premium from its 52-week low of $141.45.
P&G's Price Performance
PG is trading above its 50 and 200-day moving averages, indicating robust upward momentum and price stability. This technical strength reflects positive market perception and confidence in PG’s financial health and prospects.
P&G Stock Trades Above 50 and 200-Day Moving Average
Strategies Support PG’s Rally
P&G is a stalwart in the consumer goods industry, with a comprehensive business model and operations in more than 180 countries. PG features a diverse portfolio of brands in categories like home care, personal care and health care. Its strong brand loyalty enables it to command premium pricing, sustain market share and compete effectively, reinforcing its market leadership.
The stock’s upward trajectory is well-supported by its stringent focus on productivity and cost-saving plans to boost margins. Continued investments in the business, alongside efforts to offset macro cost headwinds and balance top and bottom-line growth, underscore its productivity efforts. The company is focusing on achieving significant cost savings in its operations.
For fiscal 2024, PG delivered strong cost savings and is exploring more opportunities to save as it continues to develop its three-year rolling productivity master plans. The goal is to achieve up to $1.5 billion in gross savings in the cost of goods sold before tax in the next three years. The execution of this target is supported by its platform programs with global applications across key categories such as "Supply Chains 3.0," which involves modernizing and optimizing supply-chain operations.
Also, collaboration with retailers enables identifying more comprehensive and effective savings opportunities. The company uses digital tools to improve fill rates, and optimize dynamic routing and sourcing. These technological advancements are expected to create saving opportunities of $200-$300 million, with a target to reduce overhead costs and improve the effectiveness of its marketing efforts.
PG Falls Short of Industry Peers
Shares of Procter & Gamble have shown a steady year-to-date rise. However, a close study of the stock performance reveals that it has underperformed the industry in this period. Notably, the PG stock has risen 21% year to date compared with the industry’s rally of 23.4%.
The PG stock has also underperformed its peers like Colgate-Palmolive CL and Unilever UL, which recorded gains of 32.3% and 35.3%, respectively, in the year-to-date period.
PG Vs Peers
Obstacles in P&G’s Global Strategy
Unlike its peers, Procter & Gamble faces soft trends in certain international markets, including market issues in Greater China, challenging macroeconomic conditions, geopolitical tensions across various regions and substantial financial impacts of currency volatility.
The company continues to face weak market conditions in Greater China, its second-largest market, due to unfavorable macroeconomic conditions that dampened consumer spending trends in the region. Brand-specific issues with its flagship beauty brand, SK-II, linked to its Japanese heritage, is another headwind. Backed by these challenges, organic sales in the region fell 8% year over year in the fourth quarter, with a 9% decline for fiscal 2024.
In the fiscal fourth quarter, sluggish sales were led by weak market conditions, contributing to a significant drop during the key 6/18 shopping period, mirroring earlier declines during Chinese New Year and Valentine’s Day. While P&G expects gradual improvement in market trends and SK-II performance, it does not anticipate a return to growth in the region or for SK-II for at least another quarter or two.
P&G is also experiencing soft volume trends in several enterprise markets across Europe, and the Asia Pacific, Middle East and Africa regions, including Egypt, Saudi Arabia, Turkey, Indonesia, Malaysia and Russia. These markets have been particularly affected by geopolitical tensions, reducing consumer spending and slowing retail activity. Ongoing boycotts of Western brands in the Middle East pose further challenges.
The company is also grappling with currency volatility and rising commodity costs. P&G projects significant after-tax impacts of $200 million from foreign exchange fluctuations and $300 million from commodity cost pressures in fiscal 2025.
PG’s Premium Valuation
P&G is currently trading at a forward 12-month P/E multiple of 25.06X, exceeding the industry average of 23.89X and the S&P 500’s average of 21.45X. Currently, the PG stock’s valuation seems pricey. The stock also trades at a premium to Clorox CLX, which trades at a forward 12-month P/E of 24.75X.
Investors could face significant downside risks if the company's future performance does not meet expectations. The consumer goods market is becoming increasingly competitive, and PG's innovation and market expansion may not be enough to drive significant growth. Economic headwinds and increased competition could hinder the company’s ability to maintain its current growth trajectory.
Is it Prudent to Buy the PG Stock?
While P&G has achieved new highs in its recent stock performance, prospective investors should exercise caution. The company's strong market position, focus on productivity and cost-saving initiatives offer a promising outlook. Its extensive global presence and diverse brand portfolio provide a stable revenue foundation. However, challenges in key markets like Greater China and geopolitical tensions in emerging regions create significant headwinds.
Given the stock’s high valuation and recent rally, investors might be cautious about entering at the current levels, suggesting higher risks. For existing shareholders, holding on to this Zacks Rank #3 (Hold) stock could be a wise decision, given its strong long-term potential.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Investment Research
The Fidelity MSCI Consumer Staples Index ETF (FSTA) was launched on 10/21/2013, and is a passively managed exchange traded fund designed to offer broad exposure to the Consumer Staples - Broad segment of the equity market.
While an excellent vehicle for long term investors, passively managed ETFs are a popular choice among institutional and retail investors due to their low costs, transparency, flexibility, and tax efficiency.
Sector ETFs also provide investors access to a broad group of companies in particular sectors that offer low risk and diversified exposure. Consumer Staples - Broad is one of the 16 broad Zacks sectors within the Zacks Industry classification. It is currently ranked 10, placing it in bottom 38%.
Index Details
The fund is sponsored by Fidelity. It has amassed assets over $1.20 billion, making it one of the average sized ETFs attempting to match the performance of the Consumer Staples - Broad segment of the equity market. FSTA seeks to match the performance of the MSCI USA IMI Consumer Staples Index before fees and expenses.
The MSCI USA IMI Consumer Staples Index represents the performance of the consumer staples sector in the U.S. equity market.
Costs
Investors should also pay attention to an ETF's expense ratio. Lower cost products will produce better results than those with a higher cost, assuming all other metrics remain the same.
Annual operating expenses for this ETF are 0.08%, making it the least expensive product in the space.
It has a 12-month trailing dividend yield of 1.81%.
Sector Exposure and Top Holdings
It is important to delve into an ETF's holdings before investing despite the many upsides to these kinds of funds like diversified exposure, which minimizes single stock risk. And, most ETFs are very transparent products that disclose their holdings on a daily basis.
This ETF has heaviest allocation in the Consumer Staples sector--about 99.80% of the portfolio.
Looking at individual holdings, Procter + Gamble Co/the Common Stock (PG) accounts for about 11.95% of total assets, followed by Costco Wholesale Corp Common Stock Usd.005 (COST) and Walmart Inc Common Stock Usd.1 (WMT).
The top 10 holdings account for about 62.46% of total assets under management.
Performance and Risk
The ETF has added roughly 17.15% and was up about 19.64% so far this year and in the past one year (as of 09/17/2024), respectively. FSTA has traded between $40.85 and $51.72 during this last 52-week period.
The ETF has a beta of 0.60 and standard deviation of 13.26% for the trailing three-year period, making it a medium risk choice in the space. With about 108 holdings, it effectively diversifies company-specific risk.
Alternatives
Fidelity MSCI Consumer Staples Index ETF carries a Zacks ETF Rank of 3 (Hold), which is based on expected asset class return, expense ratio, and momentum, among other factors. Thus, FSTA is a good option for those seeking exposure to the Consumer Staples ETFs area of the market. Investors might also want to consider some other ETF options in the space.
Vanguard Consumer Staples ETF (VDC) tracks MSCI US Investable Market Consumer Staples 25/50 Index and the Consumer Staples Select Sector SPDR ETF (XLP) tracks Consumer Staples Select Sector Index. Vanguard Consumer Staples ETF has $7.38 billion in assets, Consumer Staples Select Sector SPDR ETF has $18.53 billion. VDC has an expense ratio of 0.10% and XLP charges 0.09%.
Bottom Line
To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.
Zacks Investment Research
For Immediate Release
Chicago, IL – September 17, 2024 – Today, Zacks Investment Ideas feature highlights Walmart WMT, Procter & Gamble PG and Coca-Cola KO, Alphabet GOOGL, Meta Platforms META, Oracle’s ORCL and Nvidia’s NVDA.
Tech Stocks Are Cheap, Value Expensive: A Rare Opportunity?
In recent months, we've witnessed a significant rotation in the stock market, with investors gravitating toward defensive, value-oriented stocks as they brace for an economic slowdown and potential shifts in interest rate policy.
This flight to safety has caused many value stocks—traditionally considered stable but slow-growing—to become highly sought after, driving their valuations higher. At the same time, tech stocks, known for their growth potential, have seen their prices drop, creating an unusual dynamic where some of the market’s most innovative companies are now trading at lower relative valuations.
This presents a unique opportunity for investors. While value stocks like Walmart, Procter & Gamble and Coca-Cola have been bid up due to their perceived safety, tech giants like Alphabet and Meta Platforms are now priced very attractively. Despite their lower valuations, these tech companies still have superior growth prospects, making this a rare moment where investors can acquire high-growth stocks at a discount, while more defensive stocks have become relatively expensive.
In this article, we’ll explore how this market dynamic has unfolded and why tech’s current pricing could be an opportunity you don’t want to miss.
Defensive Stocks Have Led the Market
If you have been following my recent write-ups you will know that I have been talking about this rotation for some time now. Below we can see that defensive ETFs such as Value, Healthcare and Utilities have held up better than Tech and the broad market over the last few months.
While it has been a good ride for those that were early in the trend, I am not sure this theme will continue much longer. In the chart above, we can see how stark the comparative valuations are now, with the tech stocks trading lower forward multiples than the value stocks.
However, the narrative has begun to shift and after several months of consolidation, tech stocks appear primed for the next leg higher. In addition to the now attractive valuations, chatter and activity surrounding Artificial Intelligence is picking up again, which should lure investors back to tech. Apple just released its newest AI enabled iPhones and Oracle’s Larry Ellison is talking about building thousands of new data centers. Ellison also said that at a dinner recently with Elon Musk and Nvidia’s Jensen Huang, that he and Elon were begging Jensen for more GPUs.
Comparative Growth Forecasts: Tech vs. Value
When we compare the earnings growth projections for tech to value the disparity is striking. Over the next 3-5 years, tech stocks are expected to deliver far superior earnings growth.
Should Investors Buy GOOGL and META Stock?
Growth forecasts clearly favor tech stocks like GOOGL and META. Their earnings are expected to compound at rates more than double that of traditional value stocks like WMT, PG, and KO. This highlights a key point: while value stocks provide stability, their limited growth potential makes them less attractive for investors seeking high returns over the long term. On top of that, tech stocks now offer better relative valuations following the recent rotation into defensive stocks, making them an even more compelling buy.
For example, GOOGL and META, despite their higher growth potential, currently trade at forward P/E multiples lower than their historical averages, as investors have become more cautious on tech. Meanwhile, WMT, PG, and KO, with slower growth prospects, are trading at elevated P/E ratios compared to their historical norms, as investors have flocked to these defensive names amid economic uncertainty.
This unusual dynamic presents a rare opportunity for investors. Buying tech stocks with high growth potential at attractive valuations can offer a combination of both growth and value. On the flip side, while value stocks provide near-term safety, they may be fully priced, with limited upside left if growth fails to materialize.
For investors, the key takeaway is that tech stocks are offering a better balance of growth potential and reasonable valuations, while value stocks, despite their recent popularity, may be nearing their upside potential.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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