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) - Get Avon Products, Inc. Report
, 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) - Get Estee Lauder Companies Inc. Class A Report
, 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
TheStreet Recommends
Dial
(DL) - Get China Distance Education Holdings Ltd. Report
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) - Get Procter & Gamble Company Report
, 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) - Get Genpact Limited Report
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) - Get Clorox Company Report
,
Kimberly-Clark
(KMB) - Get Kimberly-Clark Corporation Report
, Avon, and to some extent Procter & Gamble, will see some good moves over the next six to 12 months."
