Consumer Stocks: Valuations Hit 20-year High

Sanlam FOUR's Colin McQueen examines the cost of popular consumer stocks, and asks whether investors are paying too much for what they love

External Writer 2 August, 2016 | 2:23PM
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Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Colin McQueen, manager of the Sanlam FOUR Global Equity Fund urges investors to look beyond consumer staples as valuations hit 20-year high.

The spread of valuations across the market is very wide at the moment. Back in February, the spread of valuations was almost as wide as what we witnessed during the tech bubble. When you find this sort of phenomenon, typically it suggests investors need to pay a lot more attention to valuations. Investors today are paying a pretty full price for what they love, but there are some wide discounts on offer for companies out of favour.

For example, the forward P/E ratio of the consumer staples sector is at a 20-year high. Free cash flow yields for most consumer staples, such as Nestle (NESN), are trading in the range of 4-5%. It is not catastrophically low, but it is very low by historical standards. However, if you cast the net wider and look at companies such as Microsoft (MSFT), Oracle (ORCL) or some of the healthcare services names – there are free cash flow yields in the region of 6-7% or more.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Medtronic PLC106.87 USD0.00Rating
Microsoft Corp323.01 USD0.00Rating
Nestle SA118.82 CHF0.00Rating
Oracle Corp88.24 USD0.00Rating

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