Avoid This Sector Until Further Notice!

You’ll want to find out why things may be getting worse for Rogers Sugar Inc. (TSX:RSI) and several others before they get better in 2018.

| More on:

Following an almost inexplicable rise over the past decade, the momentum has come to a screeching halt for stocks in the consumer staples sector during the first four months of 2018.

After the sector rose nearly four-fold between 2009 and late 2017, Consumer Staples Select Sect. SPDR (NYSEARCA:XLP), an exchange-traded-fund (ETF) designed to track the performance of companies in the consumer staples sector, has fallen by nearly 14% since the end of January.

In some segments of the market, like commodities or technology or artificial intelligence, a short-term correction like that might be considered to be the norm.

But for a sector like consumer staples — a part of the market that draws investors in search of safety and security — a 14% loss in the span of fewer than three months is going to catch many by surprise.

What went wrong?

Following the disastrous 2008-09 financial crisis, risk tolerance was at an all-time low — or, to put it another way, risk aversion was at an all-time high.

While in past cycles, portfolio managers would typically underweight low-risk sectors like consumer staples to help them “beat the market,” following the Great Recession, many were no longer able to bear the risks, opting instead to go the route of safer companies like The Coca-Cola Co (NYSE:KO), Procter & Gamble Co (NYSE:PG), and their more reliable earnings streams.

In addition, interest rates have been at or near all-time lows for much of the past 10 years, and suddenly a 3.93% dividend yield from Proctor and Gamble didn’t look so bad next to the 2.25% yield on a long-term Government of Canada bond.

But as markets are wont to do, things got carried away, and thanks to some overenthusiastic investor optimism, the consumer staples sector is now one of the most expensive parts of the market, which doesn’t make a lot of sense given that big retailers like Wal-Mart Stores, Inc. (NYSE:WMT) have more bargaining power than ever and are slowly but surely squeezing the prices of everyday household products.

When a scenario like that starts to unfold, it usually doesn’t take much to “pop the bubble,” so to speak. And that’s just what happened after a string of disappointing earnings reports came out of the sector last week.

What should you do?

Fear creates opportunity, and just because the sector as a whole may have become a bit rich doesn’t mean there isn’t value to be had.

Molson Coors Canada Inc. (TSX:TPX.B)(NYSE:TAP) stock is trading at 52-week lows, as is the stock of Kraft Heinz Co. (NASDAQ:KHC) with both companies currently getting favourable recommendations from Wall Street.

Meanwhile, one of Canada’s small caps, Rogers Sugar Inc. (TSX:RSI), may a different story altogether.

Last year, the company paid $40 million to acquire maple syrup bottler Decacer, and now the company is faced with a heavier financial burden, not to mention estimates of somewhere between $15 and $25 million this year to comply with new emissions standards for its beet-processing facilities.

Rogers Sugar was already up to its neck trying to meet its ongoing dividend payments, and with the new compliance requirements staring the company head on, this may be a stock to avoid for the time being.

Investors in search of a better alternative may, however, find their answer in the energy sector — one of the hottest segments of the market so far in 2018.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jason Phillips owns the Molson Coors Brewing 25-strike January 2019 calls. The Motley Fool owns shares of Molson Coors Brewing.

More on Dividend Stocks

financial freedom sign
Dividend Stocks

Generate Enough Passive Income to Retire

Looking to generate a stream of passive income to retire on? Here are several stocks to start building out your…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Stocks to Hold for a Reliable Source of Passive Income

Are you looking for a way to produce a reliable source of passive income? Hold these three stocks!

Read more »

worry concern
Dividend Stocks

3 Stocks to Buy if You Are Worried About a Recession

There are a lot of safe investments that can help your portfolio remain afloat during a recession and the market…

Read more »

Two colleagues working on new global financial strategy plan using tablet and laptop.
Dividend Stocks

2 Canadian Dividend Stocks I Just Bought During the Selloff 

There are plenty of high-quality investments to consider today, but these two Canadian dividend stocks are easily among the best.

Read more »

Dividend Stocks

Top 3 Utility Stocks for Stability and Consistent Income

These utility stocks could continue to return cash, irrespective of the volatility in the market.

Read more »

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Tradeoff: Lower Home Prices for Higher Debt Burden

Buyers welcome lower home prices but more rate hikes will increase their financial burdens.

Read more »

Dividend Stocks

1 Top REIT to Buy Amid Housing Price Cooldown

Consider investing in this Canadian REIT if you want to capitalize on the housing price cooldown right now.

Read more »

stock analysis
Dividend Stocks

TFSA Passive Income: 2 Oversold Dividend Stocks for Self-Directed Investors

These top TSX dividend stocks look cheap right now.

Read more »