3 Stocks to Sanitize Your Portfolio

These companies boast non-cyclical, stable businesses that tend to do relatively well during economic upheavals and market downdrafts

Vikram Barhat 28 October, 2020 | 1:29AM
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Few other things have proved to be as pandemic-proof as the demand for personal and home cleaning products. The robust revenue and profit numbers of consumer staples companies selling these products are a clear indication that no matter the level of uncertainty, consumers will continue to buy products considered essential. In fact, as evidenced by robust organic sales, personal and home hygiene products are particularly sought after as survival tools needed to limit the spread of the coronavirus.

These companies boast non-cyclical, stable businesses that tend to do relatively well during economic upheavals and market downdrafts, meaning they can be expected to generate solid revenue during the pandemic and into the foreseeable future. They are leading players in Morningstar’s consumer defensive coverage universe as well as are stable cash-flow stories.

Year to date, as of Oct. 26, due to coronavirus-driven sales of homecare products, they’re trading well above their fair values, far outstripping the 6.77% gains for the Morningstar U.S. Consumer Defensive Total Return Index. It may be prudent for value-seeking investors to wait for a meaningful pullback to open up attractive entry points with some margin of safety.

Clorox Co
  Ticker CLX
  Current yield: 2.10%
  Forward P/E: 28.74
  Price US$212.30
  Fair value: US$154
  Value 37% premium
  Moat Wide
  Moat Trend Stable
  Star rating *
Data as of Oct. 26, 2020

More than a century old consumer staples company, Clorox (CLX) sells cleaning supplies, laundry care, trash bags, cat litter, charcoal, food dressings, water-filtration products, and natural personal-care products. The firm’s product portfolio includes Clorox disinfecting wipes and bleach cleaner sprays, Liquid-Plumr (drain cleaners), Pine-Sol (floor cleaning agents), SOS (scouring pads and scrubs), Brita (water filtration), and Burt’s Bees (personal care). About 85% of Clorox’s sales comes from its home turf.

“The COVID-19 outbreak has left consumers scouring the shelves for Clorox's fare, leading to a pronounced bump in near-term sales,” says a Morningstar equity report, noting its cleaning mix (around one third of sales) has soared more than 30% in each of the past two quarters. Resultantly, the company’s shares up nearly 40% since the start of 2020, far exceeding the 5.2% gains for the S&P 500, as of Oct 26.

The pandemic has swayed more consumers to cook at home, creating an opportunity for the firm’s Kingsford brand (charcoal briquettes). “Even if volumes decelerate as shelter-in-place initiatives are lifted and consumers gradually increase their consumption of food away-from-home, we think Clorox has laid out a solid playbook that should steady the grilling business over time,” says Morningstar sector director, Erin Lash, who estimates the stock to be worth US$154.

Colgate-Palmolive Co
  Ticker CL
  Current yield: 2.22%
  Forward P/E: 25.32
  Price US$78.41
  Fair value: US$71
  Value 12% premium
  Moat Wide
  Moat Trend Stable
  Star rating **
Data as of Oct. 26, 2020

Global consumer goods company, Colgate-Palmolive (CL) makes a wide range of products including oral care, personal care, and home care, which are sold across 200 countries around the world. International sales account for about 70% of total, approximately 50% from emerging regions.

Bouncing back from two years of tepid sales, the company’s organic sales were up 4% in 2019. “We think the balanced nature of the gains (a 2% benefit from increased volumes and 2% from higher prices) is a testament to its recent strategic course and unwavering competitive edge,” says a Morningstar equity report.

The firm’s sales this year have got a boost from coronavirus stock-up trips. A portion of these gains is attributed to “consumers’ penchant for home and personal cleaning,” says a Morningstar equity report, but adds “the pace of gains will decelerate over the next several quarters, as consumers work through their at-home inventory.”

The report, however, assures Colgate's portfolio will prove resilient even though the economic recovery will likely remain weak. “We're encouraged that management’s rhetoric suggests a commitment to investing in product innovation to prompt consumers to stay within its brand pillars regardless of the economy,” says Lash, who recently upped the stock’s fair value from US$70 to US$71, prompted by improved cash generation.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Clorox Co164.56 USD1.34Rating
Colgate-Palmolive Co76.63 USD-0.05Rating
Procter & Gamble Co143.55 USD-0.44Rating

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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