Time for anti-tech stocks

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Good morning. In its third-quarter report, Home Depot delivered same-store sales well below inflation, flat earnings, a cut to its outlook and these dour words from the chief executive: “The economic uncertainty continues, largely now due to living costs. Affordability is a word that’s being used a lot; lay-offs, increased job concerns, et cetera. So that’s why we don’t see an uptick in that underlying . . . demand in the business.” Housing has long been a weak corner of an otherwise vital economy, but it is notable that rate cuts have not stimulated demand for paint and drywall as of yet. We have been a bit sceptical of the K-shaped economy as an explanation of recent anomalies in the macro data, because the evidence for it is mostly anecdotal. But put enough anecdotes together and you have something more. Reports like Home Depot’s matter. We will be listening closely to TJX, which reports today, as well as Walmart and BJ’s in the coming days. Email us: unhedged@ft.com. 

Staples stocks

It’s hard to think of a sector that has been hated more for longer than staples, or, as I like to call it, anti-tech. Here is the S&P 500 staples sector’s performance relative to the market since early 2016, when the troubles began:

There are two stories captured in that chart. Staples has three subsectors: food, beverage and tobacco; household goods; and staples retail. The staples retail subsector has done fine, as you might expect, given that Walmart and Costco make up 84 per cent of it. It has only trailed the wider index by two or three percentage points a year. FBT and household goods, on the other hand, have had a terrible decade in relative terms, compounding at about half the rate of the wider index. 

But there is nothing like a bubble scare to stimulate interest in defensive sectors. Here is S&P sector performance since October 31, when the Nasdaq mini-rout began. Staples is one of three positive returners:

Bank of America’s excellent Fund Manager Survey finds that money managers remain significantly underweight the sector. But in November, there was a shift towards all the defensive categories, with staples getting the third-biggest bump:

And as we pointed out recently, staples stock do well in times of trouble. FBT and household goods managed positive performance during the dotcom crash:

And while they took a big hit during the great financial crisis, they beat the market by 20 points: 

And, as you can see in the very first graph above, staples gave a repeat (out)performance in the horrible inflation year of 2022. 

How have FBT and household goods companies become so deeply unloved? Lauren Lieberman, an analyst at Barclays, says the sectors’ problems come down to revenue growth, which has been under pressure for a number of reasons. Most recently, wages have not kept up with inflation, leaving consumers scrimping. In the case of food and drink, there are questions about whether consumption habits have changed for good, especially with the advent of GLP-1 drugs. And finally, there has been a longtime trend, interrupted only briefly by Covid-19, of niche brands taking share from national brands. Lieberman points to Procter & Gamble, which in its most recent investor call said only 24 of its top 50 country/category combinations held or grew share in the quarter.

But if you think that the wage issue is cyclical, that snacking will make a comeback and that the national food and household goods brands can reinvigorate their offerings, you have the making of a buy case, especially if you think an artificial intelligence meltdown is a real possibility. If inflation is one of your worries, the buy case gets stronger still: staples seem likely to outperform bonds under stagflation. Finally, for the past few days at least, the momentum is turning in the group’s favour. 

There is just one problem: the stocks are not that cheap. FBT and household goods subsectors trade at a notable discount to the market, but given their low growth, they don’t look cheap enough to attract hardcore value seekers. Here are the 15 largest by market cap:

Exciting? No. Cheap? No. But if you are afraid of an AI catastrophe, stockpiling food and soap is not a terrible idea.

One good read

So much stuff.

FT Unhedged podcast

Can’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.