Should food stocks be a portfolio staple?

Photo of Robert Brain By Robert Brain

min read

Consumer staples are those essential items that consumers are unable or unwilling to reduce from their weekly spend, hence consumer staples stocks are often said to be an essential part of retail investors’ portfolios.

This might be true, but are these stocks winners? This article looks at the consumer staples sector and three key stocks – Woolworths, Wesfarmers and Metcash.

First, let’s look at the price performance of the consumer staples sector index (ASX code: XSJ), which only includes companies from the top 200 stocks (the S&P/ASX 200 (XJO) index). The XSJ sector currently has only 15 stocks, with Wesfarmers the largest by market capitalisation at 45 per cent of the index. Woolworths is the second largest and Metcash is seventh.

The first price chart is a monthly showing the XSJ sector index over 10 years.

Consumer staples sector (monthly line chart over 10 years)

© August 2016, Robert Brain
Larger charts and more details: Brainy's Share Market Toolbox

Is the consumer staples sector a safe haven in tough times? It fell 33 per cent over 16 months during the GFC in 2008 and was down 23 per cent over three years from a peak in early 2013.

With Wesfarmers comprising 45 per cent of the index, we might expect this index chart to look something like the chart of Wesfarmers. The first lesson here is that it might be a waste of time focusing on sector performance, because some stocks can be overweight in the sector.

How have other stocks in the sector performed, and what about other consumer staple stocks that are not in the top 200 and therefore not in the sector index? There are currently 56 of them.

The next chart is a comparison showing the percentage performance of our three stocks and the sector (the vertical axis is percentage change in price). We can see that Metcash (MTS) is up about 90 to 100 per cent over the year.

Comparative percent performance chart — 12 months (weekly chart)
(comparing XSJ sector index to WOW, WES, MTS)

© August 2016, Robert Brain

Notice that Wesfarmers (WES) and the sector index track each other very closely and they have been flat for the past 12 months. Any money invested there would have been a lost opportunity.

The second key lesson is to watch the price trend. One of the six key tenets of Dow Theory basically says that a trend is a trend is a trend, until it is no longer a trend. An uptrend is a sequence of higher peaks and higher troughs.

Also notice that almost every time the price of Metcash dipped and formed a new trough on the chart, the trough was higher than the one before. Except for the middle of the chart, we can see successively higher and higher peaks (an uptrend).

The pause in the uptrend from January to April 2016 simply shows that the majority of buyers were not convinced higher share prices were justified at that time. The price had run too far ahead of itself and was simply biding time waiting for the price to catch up.

What about Woolworths, the stock the experts say needs to be in everyone’s portfolio?

The next chart is a daily price chart of Woolworths (WOW) over 18 months from a peak in February 2015. It clearly shows a downtrend. As the price cycled up and down, it made successively lower troughs and lower peaks. The downtrend line sits on top of the price action and appears to act like a ceiling above the share price.

Woolworths Limited (daily chart, 18 months)

© August 2016, Robert Brain

On this chart some of the previous peaks are marked as resistance levels. They were resistance in the past and they might form resistance levels again, as the share price rises in the weeks and months ahead.

The downtrend line sits on top of the falling share price, but in July 2016 the price pushed above the downtrend line to indicate a weakening of the trend. Then the price rallied strongly and on July 25 gapped up above the $23 resistance level.

This tall white candle is known as a Big White candle. It has no lower tail and a very short upper tail and is considered bullish. Note the daily volume on the same day – a Volume Spike that is about four times the daily average of volume.

Until the end of this price chart (August 15) the share price traded within the range of that Big White candle. This indicates some market participants were keen to sell because they believed the price was too high, while others were keen to buy because they believed the price was good value.

This is the typical tug-of-war between buyers and sellers that takes place every day in the markets.

About the author

Robert Brain is a sharemarket analyst and Nimble Short Term Investor, and runs Brainy's Share Market Toolbox web-based business, supporting investors and traders. He is a national director of the Australian Technical Analysts Association (ATAA) and vice-president of the Melbourne ATAA Chapter. The price charts shown are produced using the Australian BullCharts software and Robert heads the Australian BullCharts User Group.

About the ATAA
Financial markets – education and networking resources. The ATAA is a not-for-profit association of people interested in the application of technical analysis. Many members operate their own SMSF, some are private traders/investors and some are professionals in the financial services industry. The ATAA has nine Chapters around Australia, in capital cities and provincial centres.

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