Vincent Shen: I know there were at least a few tickers in other aspects of this
consumer staples category that you wanted to highlight, and how they've outperformed this year.
Where do you want to start?
Asit Sharma: I want to dive in with the largest holding of the XLP.
Listeners, I'm going to pause for two seconds while you try to guess the largest holding.
I think I already gave it away earlier in the show. It's Procter & Gamble, which is 13% of this fund.
I know there are some board members at Procter & Gamble who, these past few weeks,
are thinking, "How do you like me now?" This was an unloved stock.
I'm going to give you the annual average return of Procter & Gamble going back to this period
that Vince talked about, the beginning of the financial crisis.
I did a search for an anchor date of January 1, 2008.
The company has only returned about 7% a year in this great bull market, versus the S&P's
nearly 13% annual return. That's because it's had very slow organic growth.
It's had to compete with the smaller brands that have taken advantage of e-commerce,
and how cheap it is to build out a new brand and take it to market.
It's had some other difficulties in its approach to brands, which we've talked about on this show.
Listeners are familiar with the plethora of products that it's had in the past.
It has reduced that product line. It's reduced its brand line.
Still is looking for a turnaround.
Of course, we've also recently talked about board member Nelson Peltz, who's an activist shareholder,
looking to effect change at the company.
The reason that Procter & Gamble, which was down almost 26% just a few months ago, is
now even for the year and is one of the best-performing stocks in the S&P 500 over that period,
is that it's a stalwart flight-to-quality company.
When you hear the talking heads on TV mention defensive stocks, and terms like "flight-to-quality,"
they're really talking about these companies which grow revenues very slowly.
The more stable the cash flow, the less volatility there is in the earnings.
What becomes a black mark on a company when the market is rising, and technology companies
are grabbing everyone's attention, those become virtues when folks are starting to run scared
and thinking about, "What's going to happen to my capital?
I had it invested in some high-flying stocks, and I see they're down about 20-25% in just
the last couple of weeks. How will I preserve that capital?"
This is why a stock like Procter & Gamble becomes so attractive.
I should mention that, in addition to the really stable cash flows it's known for,
it still throws off that widows and orphans dividend yield, which we've talked about on this show.
I looked this morning, it's currently at 3%. That's not a bad yield if you have to park some of your money.
The reason that this stock in particular is starting to stand out on many lists is because
of the relative underperformance over the last few years.
The thinking is, there's some upside here, especially if Peltz can initiate some of the change he wants.
Maybe this could be more than a 7% return, and it provides that defense in an uncertain market.
What are your thoughts, Vince, about P&G? Shen: I think that's a great overview. It's funny.
We last talked about P&G in late September, and really, I don't think anything has changed
fundamentally since then in terms of the story.
We know that around the middle of the year, the stock got a boost thanks to the push from
activist investor Nelson Peltz.
But we're not at a point yet where the company has come out and officially announced that
they're adopting any of these major changes that Peltz has offered up as a way for the
company to return to the stronger growth and better portfolio of brands that it had.
But the stock is up over 17% in the past month. I think you summed it up.
Even though the story hasn't changed, as somebody looking in from the outside, you have a company
that is looking to pay $7 billion in dividends and do $5 billion of share buybacks for fiscal 2019,
that has to be looking pretty good right now, even though they've been struggling relatively
for the company, in terms of growing and maintaining their market share.
This is still a company that has a portfolio of many well-known, household-leading brands.
I think that really does sum up this idea of the flight-to-quality.