TINA and the peanut butter
Why consumer goods are still likely to be stock market favourites in the years ahead
Published
September 4, 2024
Technology businesses have captured most of the stock market limelight over the past decade.
Huge valuations, rapid expansion and their creeping into almost every part of our lives, has made it feel as though businesses like Facebook or Amazon are the ones to go for if you’re looking to invest.
This has obscured the fact that many investors have been putting sizeable sums of cash into consumer goods brands. Companies like Unilever, PepsiCo and Johnson & Johnson have all seen their share prices rise dramatically since the financial crisis in 2008.
Another investor favourite during that time has been JM Smucker. The company, which owns Jif peanut butter and Dunkin’ Donuts, has seen its share price rise by close to 100% over the past 10 years.
The company released its latest set of quarterly results on Tuesday evening. Sales were up by 4% on the same period last year, with people buying more groceries and branded consumer goods during the pandemic.
JMS has also seen decent growth over the past decade. The conglomerate made £4.6 billion back in 2010. That rose to £7.8 billion in the 2020 fiscal year, although there has been little growth during the past few years.
Our often myopic focus on technology, whether it be Apple’s latest iPhone or some start-up making solar panels, can make us forget that firms like JMS continue to have strong demand for their products.
In fact, there’s a good argument to be made that these companies are largely immune from technological developments. Peanut butter, coffee and canned goods are unlikely to change — as long as people like the taste of them, they’ll keep buying them.
And that’s a big part of the reason that investors have been happy to put so much money into companies like Unilever and JMS. There aren’t likely to be any dramatic changes in the demand for their products and, as JMS shows, there’s even room for some expansion.
Another factor at play here has been the long period of low interest rates that we’ve seen in the past decade. That has made bonds, the traditional go-to asset for more risk-averse investors, much less appealing.
As a result, investors have been looking for assets that can provide similarly low-risk returns in the stock market.
Historically, tobacco stocks were a popular option to achieve this goal. But regulatory pressure, growth concerns and declining smoking rates have all made investors less keen on them.
By contrast leading consumer goods brands, with the ability to charge what they want and not lose customers, have managed to provide the mix of security and return that yield-starved investors want.
The era of low interest rates doesn’t look like it will be coming to a close any time soon and that means investors will probably still look positively at consumer goods firms.
There are plenty of positives to look at here. As we’ve already seen, these are fairly stable companies with both solid demand for their products and some room for growth.
But the problem comes when investors are only putting money into these businesses because they feel that there is no alternative. Or as stock market nerds like to say, TINA.
The problem with TINA is that it means stock prices are not reflective of real demand or value. Instead they get inflated as people feel they have nowhere else to put their money.
This has arguably affected large swathes of the US stock market and may explain why prices are so high when the economy is doing abysmally.
To be fair, JMS shares don’t appear to have been caught out by this. They reached a peak of $154 in 2016 and have mostly been trading between $100 to $120 since then.
But others, like Unilever, have continued to rise in price, even though cash flows, revenue and profits have remained largely the same since 2010.
The danger there is that, if other investment options do appear, then investors may decide to cash-in on their consumer goods positions and move their money elsewhere.
If the economy does start to pick up in 2021, companies that often outperform the market during periods of economic strength could take attention away from the steady compounders.
Airlines, banks and real estate are just a few sectors that like consumers having a bit more money in their pockets.
This rotation is unlikely to happen overnight but it could mean we won’t see much more of the sort of growth that the defensive consumer firms have seen since 2008.
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