October’s Upside-Down Market

In October, it felt as if stocks fell off a cliff. Worries about rising interest rates, tariffs and trade wars dominated headlines. While the S&P 500 fell about 7 percent, many individual stocks—both within and outside the index—fell much more.

Of course, there were stocks that were positive for the month. For instance, here are some members that propped up the S&P 500 index in October:

Some stocks that went up

Organic sales growth

2016 2017
Campbell Soup -1% -1%
General Mills -4% 1%
Coca-Cola 3% 3%
Hershey 1% 1%
Walmart 3% 3%
Procter & Gamble 2% 1%
Philip Morris 0% 8%

Note: I checked the sales growth figures above to present them in the most flattering light possible, thus the “organic” label. In some cases, GAAP sales were significantly worse than presented above because of divestitures and/or currency headwinds.

 

What these companies have in common is that they’re considered “consumer staples,” i.e., they sell products consumers will buy in good times and bad. At least, that’s the narrative.

What else do all these companies have in common? They have little (in some cases no) sales growth. They’re mature, selling into saturated markets, and competing with consumption (most folks eating breakfast cereal already are consumers of breakfast cereal, and have many options to choose from). Most are challenged in a digital world that levels the playing field for small brands.

I’m not kidding. This is a thing.

 

On the other hand, innovative companies growing sales 20, 30 percent or higher, fell hard in October. A list of over 140 fast-growing disruptors I track, for instance, fell on average 14 percent. Only four stocks on the list were positive for the month; a quarter of them fell 20 percent or more.

Some of the biggest decliners were fast-growing businesses that will remain dominant for a very long time. One example is a consumer staple business of the 21st century, Alphabet (the parent company of Google). It has grown sales north of 20 percent in each of the past two years, but its stock was down 10 percent. Amazon, which has grown sales around 30 percent in each of the past two years, fell 20 percent.

What I find interesting about these price moves is that they appear short-term rational. If a recession is coming, it makes sense to sell stocks priced for growth and move money into low- or no-growth bond-like names. 

(I can’t help but point out, however, that the old-school staples are not “cheap.” For instance, if we simply take expected earnings for the upcoming fiscal year, it turns out Walmart and Coca-Cola are priced at 22x earnings, similar to Alphabet, despite significantly lower growth and inferior competitive position.)

It’s also interesting to note how long-term irrational this is. If tasked with making half a dozen investments they couldn’t touch for the next ten years, few people would choose any of the low-growth companies in the table above.