General Mills, Inc. (GIS), Lorillard Inc. (LO): Is it Time to Rotate Out of Cyclicals and Into Staples?

After a torrid start to 2013, the U.S. stock market has hit a rocky patch in recent weeks. The S&P 500 topped out just below the 1,600 level on April 11 before concerns about global growth rates triggered a rise in volatility and sent the S&P skidding back below the 1,550 level. At this point, it would seem premature for investors to bail out of equities completely, but it may be time to rotate out of riskier sectors and into more conservative stocks.

Although market timing can be extremely difficult, investors generally want to have exposure to cyclical areas of the economy when growth is picking up and the stock market is on solid footing. Conversely, when volatility rises and the market appears to be on precarious ground, more conservative sectors such as consumer staples and utilities tend to outperform.

One of the primary catalysts for the most recent sell-off was a Chinese GDP report that showed that growth in the country is tracking below economists’ estimates. A number of other economic reports have also showed that the domestic economy may be hitting a soft patch. Although the losses are relatively minor at this point, experienced investors are all too familiar with the phenomenon of stock prices falling much faster than they go up.

It is not inconceivable that all of the year’s gains could evaporate in a matter of weeks amid an accelerating downturn. For this reason, it could be a good time to access your portfolio and sell some riskier cyclical stocks for leading consumer staples names that operate conservative businesses and pay a healthy dividend.

Below, I examine three consumer staples stocks that have a number of properties that make them attractive to investors who are looking to adopt a more defensive posture. Specifically, all of these companies operate large, established businesses with market caps in excess of $10 billion. All three companies have also grown earnings per share and revenue by at least 5% over the last five years, and each of the stocks is yielding over 3%.

General Mills, Inc. (NYSE:GIS) – Despite being a conservative stock that tends to outperform during market corrections, this food conglomerate has been on fire in recent months. The stock has staged a powerful breakout from the $40 level and is up almost 29% over the last year, including a better than 23% gain in 2013. Although the stock’s valuation is hardly cheap at 17 times forward estimates, a sharp jump in revenue for fiscal 2012 suggests that the business may be set to accelerate in coming years.