Greg Guenthner

Lately, I’ve urged you to stay defensive in your search for potential new investments.

The reasons are obvious…

Sticking with the big consumer names has paid off in a big way for many investors so far this year. Traditionally stodgy stocks like Coca-Cola and General Mills have trounced the averages while a majority of the growth stocks have watched from the sidelines.

It’s an odd situation. Here we are in a rising market. The S&P 500 is up more than 10% year-to-date. Yet no one is interested in speculative or cyclical names. Instead, everyone is buying consumer stocks hand over fist.

Seabreeze Partners Management president Doug Kass likens this phenomenon to the “nifty fifty” craze in the 1960s and 1970s. Kass has labeled these outperforming consumer names the “fab five”–not bad. In addition to the two names I’ve already mentioned, Procter & Gamble, Clorox, Colgate-Palmolive round out the list.

“Historically, in a correcting market, the strongest stocks react last while the underperforming sectors begin to stabilize and bottom,” Kass writes. “It is increasingly clear that in the current market cycle the defensive consumer nondurable sector (led by the fab five) is the new nifty fifty and will likely move toward speculative excess sometime in the future.”

Right now, the fab five components are crushing the averages. Their relative strength is impossible to ignore. Even after suffering an earnings hit Wednesday that knocked shares of Procter & Gamble down 5%, the stock continues to outperform the S&P.

As a whole, the consumer staples sector is up more than 17% over the past six months. Over this same timeframe, the S&P has posted gains of approximately 12%.

We aren’t at that “speculative excess” point just yet. Many nifty fifty stocks attained ridiculous valuations before succumbing to the bear market blues of the 70s. While some P/E’s of these consumer giants are in the low 20s, I wouldn’t consider these “mania” levels…

If you stick with these names now–and sell once this fab five craze reaches fever-pitch–you’ll have strong gains to show for your efforts.

Greg Guenthner
for The Daily Reckoning

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Greg Guenthner

Greg Guenthner, CMT, is the managing editor of The Rude Awakening. Greg is a member of the Market Technicians Association and holds the Chartered Market Technician designation.