The Strength in Consumer Staples: What’s Up With That? – Campbell Soup Company (CPB), ConAgra Foods, Inc. (CAG)

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If you're familiar with Saturday Night Live you've seen the recurring skit in which Kenan Thompson hosts a talk show where none of the celebrity guests ever get to talk because he constantly interrupts to sing his theme song, Ooowee, What Up With That? What Up With That?

With consumer staples stocks hitting 52 week and all time highs you wonder-what's up with that? Shouldn't defensives be sitting out this rally, much as Thompson's guests do? Companies like Campbell Soup Company (NYSE:CPB), The J.M. Smucker Company (NYSE:SJM), ConAgra Foods, Inc. (NYSE:CAG), Hormel Foods Corporation (NYSE:HRL), The Clorox Company (NYSE:CLX)General Mills, Inc. (NYSE:GIS) and The Hershey Company (NYSE:HSY) are all hitting 52 week highs. Hormel is puzzling because despite missing on earnings is still powering higher. Valuations are getting stretched and the XLP, the consumer staple index is also at highs.

Campbell Soup Company (NYSE:CPB)The Fear Factor

These moves don't look as though they're based on fundamentals but fear...fear of sequestration, higher gas prices, and an imminent market downturn. Like utilities were a go to sector last year it looks like consumer staples are the anointed hiding place this year. Hopes of another big Buffett buy like that of H.J. Heinz Company (NYSE:HNZ) in these staples is unlikely so fear is undoubtedly at work here.

One other theory is a search for yield, anywhere and everywhere but in a fairly risk free sector. Also, retail investors and institutions who sat out the party are finally coming back but still risk averse.

Too Late To The Party?

Campbell Soup Company (NYSE:CPB) has moved up almost 20% since the end of 2012. At 17.63 P/E and a yield of 2.90% it looks okay but the PEG is saying otherwise at 2.79. New-ish CEO Denise Morrison had a full plate coming into the job with the 144 year old company's old-fashioned image needing a serious makeover. She has already acquired natural foods company Bolthouse Farms and added more "foodie" type soup offerings in on the go packaging to attract a younger demographic. The strategy seems to be working as the company beat on both top and bottom line when it reported Q2 earnings on February 13.

At an EV/EBITDA of 10.46 and return on equity of 62.08% Buffett might have done better to buy Campbell Soup Company (NYSE:CPB). Except for the tricky little matter of ten times total debt to total cash. Pocket change to Warren. For a consumer staple defensive with yield it has a surprisingly large short interest of 8.10%. Several large and well-known hedge fund names like Ray Dalio, Jim Simons, Mario Gabelli and Krys Krystinik have stakes in the name. It's not that I don't like Campbell's, I just don't like it here.

The same situation applies with Smucker's. The family founded business is still family run with Richard Smucker as CEO. It's up 25% over the last year and the short interest is decreasing. It has a slightly higher P/E at 20.20 and a lower yield of 2.20% but a lower payout ratio than Campbell's. Its EV/EBITDA is slightly lower at 9.87 and the PEG is at 2.16.

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