The chart that could keep investors in ‘low-risk’ stocks awake at night
For years it has been an undisputed fact of investment that people tend to prefer having big-name brands in their kitchens, bathrooms and elsewhere – yet this could now be changing. Ian Kelly, blogger and fund manager, explains the significance.
Among the various qualities we look for in an investment, on The Value Perspective blog, ‘source of a good night’s sleep’ tends not to feature that high up the list.
Of course we are confident adhering to a value strategy means our investments should, on average, outperform over the longer term but as contrarian investors, it is very much part of our job description to take uncomfortable decisions.
That being so, we have always found it odd that so many investors are willing to pay a premium for low-volatility assets that supposedly, as the cliché goes, ‘allows them to sleep at night’.
We find it odder still that some are willing to pay up for the kind of premiums these investments – the so-called ‘bond proxies’, such as big-brand consumer stocks – now command, all in the hope of an uninterrupted eight hours or so in bed.
If you happen to be such an investor, you may want to ignore the following chart and yet – regardless of what it may do to your sleep patterns – we would urge you read on.
Taken from the 2017 version of the influential Internet Trends Report assembled each year by Silicon Valley venture capitalist Mary Meeker, it illustrates the inroads Amazon is making into the market shares of the global giants of baby wipes and batteries.
Amazon Basics market share in the US
Source: KP Internet Trends 2017. Images: Amazon, 1010 Data. Data collected from September 2015 to August 2016. For information purposes only. The material is not intended to provide advice of any kind. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Please remember that past performance is not a guide to future performance and may not be repeated.
Now, the big reason investors buy consumer staple stocks – essentially, the businesses behind items people are generally unwilling to leave out of their shopping baskets, regardless of their financial situation – is the stability their brands consequently enjoy.
It is why Huggies manufacturer Kimberley-Clark trades on a price-to-earnings (P/E)ratio of 21 times, for estimated earnings for this year, and Pampers manufacturer Procter & Gamble trades on 23 times. P/E is away of judging the value of stocks with lower numbers suggesting better value.
It is perhaps why no less a figure than Warren Buffett, through his Berkshire Hathaway investment vehicle, bought Duracell from the self-same Procter & Gamble in 2014.
For years it has been an undisputed fact of investment that people tend to prefer having big-name brands in their kitchens and their bathrooms and indeed in their electrical goods and yet this chart suggests that is now changing.
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A false sense of security?
Granted, an important caveat here is the above chart only relates to online sales but, these days, where online leads, other markets tend to follow.
With Amazon powering past Duracell and threatening to wipe the floor with Huggies and Pampers, then, there would appear to be a serious risk investors have been paying significant amounts of money for tomorrow’s own-brand or generic items.
More than a century of data strongly suggests that when you pay a premium price for an investment, you greatly reduce the number of future outcomes that will give you a positive return.
Conversely, if you pay a low price, you should have more outcomes that give you positive returns – and knowing that means, here on The Value Perspective, we do not sleep too badly at night.
- Ian Kelly is an author on The Value Perspective, a blog about value investing. It is a long-term investing approach which focuses on exploiting swings in stock market sentiment, targeting companies which are valued at less than their true worth and waiting for a correction. Get a weekly round-up of value investing ideas
Important Information: The views and opinions contained herein are those of Ian Kelly, Fund Manager, Equity Value, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.