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Consumer Staples in 2010: Does Size Matter?


One fund manager says yes, but not in the way you might think.


2009 wasn't a stellar year for the consumer staples sector -- up 13% in comparison to the broader S&P 500, which gained 25%.

However, according to wire reports, Goldman Sachs analysts "expect consumer staples stocks to at least keep pace with the broader market."

Interestingly, they found the sector "tends to moderately outperform at this stage of the business cycle when the Institute of Supply Management index, a key measure of manufacturing activity, is above 50 and rising."

With commodity prices off their highs, Goldman expects per-share earnings to rise 11% across the sector in the coming year -- about 1% to 2% above consensus estimates. Goldman's top three large-cap plays are:

  • Philip Morris International Inc. (PM)
  • Coca-Cola Co. (KO)
  • Colgate-Palmolive Co. (CL)

On the flip side of the coin, Goldman cut its 2010 estimates on Campbell Soup (CPB) and Kellogg (K) by 2% "due to concerns of tougher competition."

Fund manager and Minyanville professor Ryan Krueger had an interesting take on the news, and posed the following question:

"Of the top 10 best-performing stocks over the past decade, how many were technology stocks?"

The answer?


And how many were, in Krueger's words, "boring old staples stocks"?


According to Krueger, the average move was 4000%. And he then added another interesting fact:

"There was also one thing all 10 companies had in common across all sectors -- their tiny size."

Krueger's firm is leaning toward small-caps for this reason. The specific names he mentioned were Hansen Natural Corporation (HANS) and Green Mountain Coffee Roasters (GMCR).
He says "Coke is too big for us."

So, what's the reasoning behind the "smaller is better" thesis?

In Krueger's words:

Simple math prevents large companies from making large moves. Take Coca-Cola, as you mentioned before -- it's the seventeenth largest company in the S&P at $134 billion. When I say simple math prevents a big move, I mean that it's not going to be a trillion dollar company anytime soon.

Overwhelming evidence exists of the most-owned stocks underperforming. Look at Exxon Mobil (XOM) proving that once again this year, despite run up in oil. It's a shining example of the law of large numbers yet again playing out. Despite this rally in the overall market and its sector, the stock is down 14%. So, imagine thinking to yourself this time last year that we've got a huge run in stocks and perhaps even correctly guessed oil might double in value. You then go buy the biggest oil stock and lose money. Conversely, the average return on the smallest 100 stocks of the S&P 500 index is +48%.

In a nutshell, Krueger believes size matters. Just not in the usual sense.

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No positions in stocks mentioned.
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