Avon Calling: Consumer Stocks Now a Refuge

When tech is down, what's up? Many consumer-products stocks have taken on a new luster in recent weeks, as investors flee technology issues for the safety of Old Economy shares. Among companies that have come out on top is Avon Products (AVP), which has gained 13.7% since April 10. Avon was boosted by a fortuitous report in The Wall Street Journal last week, saying the company expected earnings to beat analysts' estimates by a few cents a share.

While other consumer-products companies' shares did not post such stellar gains, the group as a whole outperformed the S&P 500 last week, except for Estee Lauder (EL), which lost 12.5% the week of the April 10. Estee Lauder unveiled its Internet strategy last week, announcing its purchase of beauty Web site gloss.com .

"Until the markets settle down, there's going to be a tug of war between the growth sectors and defensive names," predicts William Steele, consumer-products analyst at Banc of America Securities. (Banc of America has done underwriting for Dial (DL) in the past three years).

Analysts say investors should choose wisely because sluggish growth rates will continue to plague the consumer-products sector over the next year. And negative earnings surprises, such as those issued last month by Dial and Procter & Gamble (PG), could continue to haunt the sector.

In other words, even though consumer-products stocks look safe compared with volatile tech stocks, the fundamentals have not improved. Although the group has been performing relatively better after notably underperforming for some time following Procter & Gamble's preannouncement, "we believe we could see further EPS revisions for the year, as many of the issues are not short-term in nature," writes Merrill Lynch consumer products analyst Heather Hay in a recent note. (Merrill has performed underwriting for Dial, Estee Lauder, Gillette (G) and Rayovac (ROV) within the last three years.)

Banc of America's Steele says investors should include some of the stronger consumer-products issues in their portfolios, but is not predicting spectacular performance from the sector as a whole.

"Would I be overweight this group? No," says Steele. "But companies such as Clorox (CLX), Kimberly-Clark (KMB), Avon, and to some extent Procter & Gamble, will see some good moves over the next six to 12 months."

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