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

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.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Nestle SA101.94 CHF0.16
Oracle Corp57.41 USD-0.28

About Author

External Writer  .

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites
© Copyright 2020 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies