Trade Down Brands Offer Compelling Value

In a stock market as terrible as this one has been over the last year, what is an investor to do? Preserving wealth is a premium here and one way to do that is being buying defensive companies. A defensive stock buy generally falls into two categories; the things that people will need to live no matter how bad the economy gets or a company that offers a cheaper substitute. The first category is typified by the likes of Procter & Gamble (PG), Kimberly-Clarke (KMB) and Colgate-Palmolive (COL) because people will not forgo the basics of personal hygiene until all is truly lost, and although it feels that way sometimes, we are not there. The trade-down brands are also defensive for this market, some examples of those would be McDonalds (MCD), Walmart (WMT), or Treehouse Foods (THS). Jim Cramer, on CNBC’s Mad Money last night, pointed out the fact that the trade down defensive stocks are still the way to go:

“In this market, when Procter & Gamble goes down, FedEx or Norfolk Southern goes down, too. When Colgate plummets, so do IBM and Hewlett-Packard. That’s not supposed to happen. Not supposed to be like that…Even now Walmart and Verizon and McDonald’s are at levels where I would start buying them in this market.”

Graph 1Cramer is exasperated at the fact that the normally defensive companies like P&G and Colgate are not behaving like one would expect right now. However, despite the fact that the defensive stocks are not behaving as you might expect, he still thinks its a good time to look at the Walmart and McDonald’s of the market. They have continued to exceed lofty expectations and the trade down effect shows no signs of slowing. Compared to the rest of the market, there is relatively little downside risk to these companies and they should maintain their strong performance until a recovery in the economy is underway. We have included a chart of all of the companies mentioned on Monday’s Mad Money, each stock ticker has been plotted against the Ockham valuation and the last 13 week performance.

Lastly, Cramer responded to the criticisms he has been receiving from Comedy Central’s John Stewart by simply saying:

“My mantra has been clear. Obviously the critics never watch the darn show which is okay. A little cable show. I like it. I want to help preserve people’s wealth.”

Cramer is guilty of promoting Bear Stearns stock when there was clearly trouble in the air, but Bear’s stock was still in the high sixties. That was irresponsible and Cramer’s credibility takes a lump on that one, but to be fair, few anticipated the fall of 2008 being quite as bad as it turned out to be (although Cramer did warn that trouble was ahead in August of 2007, in the now famous meltdown). These clips make great fodder for the comedy show, but two points come to mind in Cramer’s defense. As you can see by the list of companies that Cramer mentions each and every week night, no one can step out on a limb that many times and be correct on each call.

Secondly, Stewart makes it sound like Cramer is the end-all of investment wisdom. Cramer is an entertainer and a guru but no one should take his advise as basis for a trade. Anyone who enters investments this flippantly should be prepared to sustain losses. As everyone who actually watches the show knows, Cramer is an entertainer who constantly urges viewers to, “Do your homework.”

Trade Down Brands Offer Compelling Value

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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