Consumer staples have been having a heckuva year due to an all-consuming search for yield and safety. Defensives like Hershey Co (NYSE:HSY), and The J.M. Smucker Company (NYSE:SJM) are rattled off on new high lists seemingly daily. P/E ratios are getting stretched and the whole sector seems dangerously overbought.
Apple Inc. (NASDAQ:AAPL) may be healthier
Apple Inc. (NASDAQ:AAPL) was last year’s darling and this year’s whipping boy. Hard to believe but Apple’s P/E at 10.04 and 2.30% yield is a better value than Smucker, best known for jams and jellies. Double the P/E and lower the yield (2.20%) and you get Smucker at 52 week highs looking a little pricey.
Not that these aren’t great American companies, but a newer American company has been lost in the shuffle that isn’t as defensive, but does offer yield and a lower P/E.
Go ahead and compare the PEGs, Apple Inc. (NASDAQ:AAPL) at .53 and Smucker at 2.24 and the jams and jellies are a little less palatable. Of course, Smucker also has coffee, pickles, peanut butter, baking products, and many more brands found in our pantries. This defensive name, even if a possible Warren Buffett target (but not likely with a strong founding family C-suite), shouldn’t have this rich a valuation.
Hershey Co (NYSE:HSY), America’s confectionery company, also has had an amazing run but its valuation is getting stretched like taffy. At a rich 30.29 P/E, you’d think this was a tech company but no, and its yield at 1.90% is getting less tempting. Its PEG at 2.55 is full of fat.
Hershey Co (NYSE:HSY) just hit another 52 week high on March 28 of $87.62. The term Bubblelicious comes to mind (although the brand is owned by Mondelez International Inc (NASDAQ:MDLZ)’ Cadbury division).
Analysts expect five year EPS growth at both Hershey Co (NYSE:HSY) and Smucker in the high single digits, about half the 18.98% growth expected for Apple.
Profit margins and operating margins at Hershey Co (NYSE:HSY) and Smucker are again half what they are at Apple Inc. (NASDAQ:AAPL). Still, almost inexplicably, Apple is down 26.17% over the last year and both these food stocks are up, 42% for Hershey and 21% for Smucker. What gives?
Affordable vs. aspirational
In Hershey’s case its smaller portion initiative became an affordable pleasure, available at every convenience, grocery, and drug store right at child height at the checkout counter. Product placement doesn’t get much better than that.
Smucker had an expanded product portfolio with a major move into coffee and the Street loved its improving earnings, beating after the bar was raised over and over again. Their products are prominent in our pantries and affordable. The stock, not so much…
Apple Inc. (NASDAQ:AAPL)’s products are still very much coveted, but the market seems to think everyone is holding their breath for the next big thing before they buy anything Apple. The price points are considered too “aspirational.” Apple doesn’t have the flexibility to raise prices that these food companies do when they face rising commodity costs.
Several analysts have noted that Apple needs to lower its prices and probably shrink those juicy margins to sell in China and other emerging markets.
A “blind” test
Imagine a blind “taste test.” Not knowing the names of these stocks Apple would likely win. Especially if you factor in the lack of debt at Apple with the debt load at Hershey and Smucker: a ratio of 1.44 and 2.94, respectively, for the most recent quarter. Then consider the lower dividend payout ratio of Apple at 12% to Hershey’s 54% and Smucker’s 42%.
In Apple’s case it all seems to come down to market sentiment on competition and innovation. There has been a lot of yammering about what Apple should do with its cash hoard, but all investors really want is that next i-something that everybody has to have. You don’t hear about the Apple ecosystem constantly anymore (although that was getting boring), nor its still amazing record as a superior retailer.
Google Inc (NASDAQ:GOOG) is a formidable competitor and has been outperforming Apple up 23.85% over 52 weeks just slightly more than Smucker. But Google has no yield and a P/E of 24.65. Google has been pulling back from its high of $844.00 on March 6 and the short interest has been growing.
Analysts see Google growing more than these consumer staples at 14.18%, but not as much as Apple. Google is reporting on April 18 and a miss or in line report would send it down and Apple up. That is what may likely happen. Then Apple reports Q2 results on April 23 and this widely anticipated report will likely disappoint as there’s been no happening new product launch or news from China and EPS is anticipated to be slightly over $10.00.
What to do after earnings
That’s when it might be time to start nibbling on Apple and holding through the end of the year. According to the IRS over three quarters of Americans will get tax refunds averaging $2800 and of the 22% will spend it. Electronics will be the purchase of choice for 44% of them.
After the tax refund spend comes back to school, dads and grads, and finally the holiday giftapalooza. By that time, there should be definitive news about Apple’s plans for its cash and some defining new product.
Even Apple permabull Gene Munster of Piper Jaffray is taking the pause that refreshes on Apple suggesting it will trade sideways for several quarters. UBS analyst Steven Milunovich added Apple to their Most Preferred List citing likely catalysts for upside as a lower cost iPhone, raising the dividend, and finally carriage on China Mobile. Until then the company is taking heartening measures like switching away from rival Samsung on supply chain components.
Oversold vs overbought: the Foolish takeaway
Hershey, Smucker, and most other consumer staples seem to be overbought in anticipation of the usual summer sell-off and worries over Europe (again). Meanwhile, Apple is stuck in a range between its 52 week low of $417.00 and $460.00. Apple is a better value just on the numbers even if the torrid growth is slowing. Apple is the name with more upside, but it may take a few quarters for sentiment to catch up.
The article Trade Out Of Consumer Staples for More Upside With Tech originally appeared on Fool.com and is written by AnnaLisa Kraft.
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