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Get Offensive With Consumer Staples

 May 04, 2011 03:18 PM

by Marc Lichtenfeld, Investment U‘s Senior Analyst

There's an old saying; when the going gets tough, the tough buy consumer staples stocks – or something like that. Historically, the sector has been viewed as a defensive position. It makes sense. Even if the economy stinks, you're still going to brush your teeth, use the toilet and feed your kids (at least I hope you are).

In the past year, the consumer staples sector, as measured by the Consumer Staples Sector SPDR (NYSE: XLP), is up 14.9 percent, outperforming the S&P 500's rise of 13.6 percent. John Roque, Managing Director at WJB Capital, points out that consumer staples and the S&P 500 are closely correlated. When consumer staples stocks are strong, the S&P 500 tends to follow suit.
To see the chart in its original size, click here.Source: WJB Capital

[Related -Staples, Inc. (SPLS): How Q3 Earnings Will Fare?]

But now with inflation rising, some investors are getting scared away from consumer staples. They believe the higher costs are going to pinch margins and will drive consumers to cheaper private label brands…

[Related -For Maximum Total Return Go For Growth]

Investors Are Wrong About Consumer Staples Future Strength

Those investors are wrong. Consumer staples should remain strong in the foreseeable future…

While commodity and raw material costs are climbing, consumer staples companies are passing those costs along to customers. Last week consumer products giants Procter & Gamble (NYSE: PG) and Kimberly-Clark (NYSE: KMB) said they were each raising prices on diapers by as much as seven percent. On Monday, Colgate-Palmolive (NYSE: CL) suggested it would also lift prices on some of its products.

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