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Why Consumer Staples Stocks Are Lagging, and How to Play Them

NEW YORK (FMD Capital Management) -- Consumer staples stocks have always been known as stalwart anchors for the majority of dividend equity portfolios. These companies provide essential products and services to consumers that are often thought to be insulated from the threat of a slowing economy.

Think diapers, cigarettes, soda and drugstores if you want to picture a sector that is known for its inelastic demand and built-in consumer base.

For those reasons alone, consumer staples have long been known as a defensive sector that investors flock to when the broader market gets volatile. When you combine those qualities with the fact that many of these stocks have above average dividend yields and lower historical price fluctuations, you get a cross-section of companies that are a perfect hiding place for conservative investors.

However, this year consumer staples appear to be leading the market lower rather than providing the protection that most investors have come to expect.

The largest exchange-traded fund that tracks this space is the Consumer Staples Select Sector SPDR (XLP). This ETF hold over $5 billion in 42 large-cap stocks that are primarily engaged in food and staples retail, household products, and beverages. The three largest holdings include: Proctor & Gamble (PG), Coca-Cola (KO) and Philip Morris International (PM). In fact, because of the market cap weighting of the underlying index, these three stocks make up over 31% of the total holdings in XLP.

When you take a closer look at these three top holdings you can see that they have been falling short over the last six months.

Proctor and Gamble recently reported earnings that dropped from the same period last year and revenue were flat despite beating Wall Street expectations. Philip Morris has been in a similar slump with profits being reported lower than last year and its forward guidance being adjusted down accordingly. Coca-Cola recently made a splash by announcing a strategic investment and partnership in Green Mountain Coffee Roasters (GMCR), but its stock price has not moved significantly in response. These are troubling signs that point to a potential stall in overall growth when compared to the broader market.

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