Is the Consumer Sector Destined to Underperform; Buffett Sells 4 stocks in Q1 2016

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13F filings show that Warren Buffett has been selling some holdings from his equity portfolio during the first quarter of 2016. That might not seem anything particular, but when you consider this investor’s motto is “Our holding period is forever” then it takes new light. He’s also quoted as saying he’ll never sell a share of Coca-Cola. It looks like when he invests his money he’s in it for the long run and has a lot of faith in future performance.

I’m going to have a look at the four stocks he sold, one of which he sold off completely, and then look at the Consumer sector to which they pertain.  You may be thinking, so what? This guy also pumped $1 billion into Apple. This is true, but Apple also is a technology stock and just used that same amount to invest in a Start-up in China.

The stocks that have fallen out of favour

Buffet cashed out completely from his positions in AT&T (T), which provides technology services to a broad range or corporate and retail clients. Its entertainment group has 25.4 million subscribers. The total sale of this stock comes after having reduced holdings in the previous quarter. The company is worth $243.5 billion and purchased satellite television company DirecTV in 2015.

He nearly sold his entire stake in Proctor and Gamble (PG), leaving himself with 315,400 shares, which represent 0.02% of his public equity portfolio. The company has a market capitalization of $219.4 billion and is trading at a P/E of 26. This sale might seem a dubious call, P&G markets consumer products in about 180 countries, has consistent sales of $1billion or above for 25 products and has a dividend yield of 3.3%.

Buffet also reduced his stake in MasterCard (MA) by 5%, the company has millions of users worldwide and allows business and financial institutions to processes their customers' payments. His allocation to this stock now represents 0.36% of his portfolio. This stock trades at a P/E of 28.78 and has a market capitalization of $105.3 billion.

Although it still represents a healthy portion of his portfolio Walmart (WMT) was also reduced by about 3%, and now represents 2.94% of his holdings. The company has a market capitalization of $210.2 billion and trades at a P/E of 14.63.

Is there something wrong with the consumer sector?

There are some questions to be asked as to the reasons for Buffett’s change of course regarding certain elements of his portfolio. Of course, I can only make some speculations as the real motivation lies with Mr. Buffett.

What stood out to me immediately was the fact that these stocks are all from the same broader sector. The act of defining them all as part of the consumer sector may be slightly limiting, Walmart is a retailer so I have also looked at that sector. MasterCard is a financial sector stock, however, its fate is highly linked to how often people will use their credit cards. That is a step further down the supply chain from the consumer sector and retail sectors to which AT&T, P&G and Walmart pertain.

The chart below shows the index for the consumer sector of the S&P 500 companies compared to the S&P 500, indexed to 100 as of April 26, 2006. We can see how over the last 6 years, as of 2010, the consumer sector has begun to outperform the broad stock market. For the years previous to the 2008 crisis this sector performed pretty much in line with the broad stock market. Since the general stock market recovered it has been outperforming at an increasing rate. Maybe it’s time to scale back on these types of stocks with a view that they will begin to underperform compared to other sectors.

consumer vs sp500Source: spindices.com

This chart shows the retail sector index of the S&P 500 against the S&P 500, again both indexed to 100 as of April 28, 2006. The Retail sector also shows the same pattern as the Consumer sector, and has been outperforming since 2010.

retail vs sp500Source: spindices.com

There may also be some idiosyncratic rationale behind the total sale of Buffett’s positions in AT&T, given that he is prone to holding periods that are perpetual when he backs a company. This would be the case of analytical insight that leads to the conclusion of a total exit of the company. It may also be part of his strategy to earn some cash that he then used to buy Apple stocks.

In either case, Consumer and Retail sectors look like they have been outperforming for some time, which may mean these sectors are ready to converge with the broader market. As we have seen with the 2008 crisis they also tend to underperform when there is market stress.

Gino D'Alessio
Gino D'Alessio

Gino has over 20 years experience as a Trader/Broker in financial markets, particularly in Bonds, FX, Derivatives and Futures, extensive knowledge of Stock Markets. He also obtained CAIA Charter in April 2015.

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