Q1 was a pretty strong earnings season, yet the S&P500 is now lower than it was at the beginning of the year thanks to the recent rout. This means that trailing price to earnings ratios have fallen. Here’s where they stand now, courtesy of Bespoke Investment Group.
We really like the first column they provide, which shows the low PE’s reached at the most bearish point of 2009. It gives a sense of the potential downside.
Yet at the same time, from a bullish perspective, what stands out most to me is the ‘Consumer Staples’ sector. It’s a defensive sector and it’s trading at just a 14.5x PE, which equates to a 6.9% earnings yield. That’s appealing.
If one looks at a long-term history, many names in this space are at lower PE’s than they’ve been on average. Despite global concerns right now, large consumer staples companies with decent balance sheets will still be around in 10 years, through thick and thin, and they’ll be even larger enterprises.
One example might be Proctor & Gamble (PG), which trades at a 14.7x PE with a 3.1% dividend yield, and has a strong balance sheet without the opaque financial nonsense of companies in some other sectors.
It shows how while there’s a lot of uncertainty in the world, there are some cheap, ‘safe-haven’ stocks in the market right now thanks to historically low valuations, entrenched franchises, and strong balance sheets.
At the very least, we’d take PG shares as a safer 10-year bet over 10-year U.S. treasuries right now which yield just 3.12% (similar to PG’s dividend yield), and provide zero protection against a weak U.S. dollar or potential inflation. Companies can at least exert pricing power to varying degrees to keep their product prices in line with inflation. They can also grow their earnings base.
In the end, you have to park your money somewhere, and given the concerns regarding currency weakness and inflation, plus worryingly-hyped commodities, perhaps defensive non-financial non-cyclical entrenched companies at historically cheap valuations are the real safe-havens right now.
Note: The author does not own securities related to Proctor & Gamble, but investors he speaks or works with may.