Home In-Depth Feature Stocks — Consumer Staples, Discretionary, Penny, and Dividend

Stocks — Consumer Staples, Discretionary, Penny, and Dividend


By Ron Lewis | April 1st, 2017

Investors who want to deal with individual stocks should read on before diving into potentially ruinous purchases. While the stock market as a whole will not go down 100 percent, any particular stock may very well do so. This is the worst-case loss scenario and it is brutal. However, the best case scenario is gains that can multiply invested capital 2, 3, or 5 times, if not more. The article will focus will be on several equity types: consumer staples, consumer discretionary, penny stocks, and dividend stocks.

What Are They?

Consumer staples are in the business of selling “bread and butter necessities” that are very difficult to go without. Try excluding food or paper towels from your life.

Consumer discretionary stocks focus on things people want, but not necessarily need. Here is the domain fast food and up-scale restaurants, the latest gadgets, various small luxuries, status symbols, and guilty indulgences.

The most treacherous siren song in the world of equities is the penny stock. Any stock that sells for less than 1 dollar per share qualifies as a penny stock. These stocks border on lottery-like dynamics of risk and return.

On the other end of the scale reside the dividend megacaps. These companies are established industry leaders and moderate in terms of gains and losses.

Variables that affect Consumer Staples

Though economic variables affect all equities to some extent, the unique competitive environment of stock type reflects differently on their respective price dynamics. Here are the variables that primarily affect consumer staples:

• New budget-friendly products and entry of new value-proposition competitors
• Proprietary developments or practices that lower production costs
• Government assistance to low-income consumers

Variables that affect Consumer Discretionary

Consumer discretionary companies don’t have quite the bottom-dollar squeeze in the market, but they do have concerns of their own such as:

• Evolving spending habits among customer base
• Branding and marketing successes/failures that can make or break a connection with key demographics
• Phase in the business cycle
Credit availability during downturns

Variables that affect Penny stocks

Penny stocks, by far the highest-risk asset class discussed here, have a unique set of fundamental variables that need to be addressed:

• Retaining key customers/clients that bring the company confidence-boosting revenue
• Maximize earnings reinvestment and use of investor funds to achieve short-term stability and niche reputation in the market
• Attract further investor interest, with an emphasis on institutional investors

Variables that affect Dividend stocks

Lastly, dividend stocks are affected by:

• Interest rate trends and policy decisions
• Response to emergent competitors that have a disruptive and advantageous business model
Debt and liquidity positions

ROI Comparison

In the past ten years, the S&P 500 Consumer Discretionary Index moved from a low of 127.30 in March 2009 to a recent high of 700.06 on March 30, 2017. This is an increase of about 550 percent from the lowest recent value, meaning that 1,000 dollars invested at the recent low would have increased to about 5,500 dollars by now.

In a similar timeframe, the S&P 500 Consumer Staples Index rose from a low of 203.45 to a recent high of 571.61. Though still an impressive gain, it represents only 280 percent in nearly ten years. 1,000 dollars invested at the low point of the Consumer Staples index would yield only about 2,800 by now. While this is certainly not bad, note that the Discretionary index gives gains that are virtually twice as large.

So if a safe investment like a consumer staples index gives mediocre returns, a more aggressive consumer discretionary index gives great returns, then a tiny penny stock bought during the depth of a recession should grow into stratospheric returns, right? Actually, and overwhelmingly, the answer is “no.”

There is no penny stock index, as such an index would be chaotic in its description and have incredibly high turnover. Individual penny stocks are plaqued by a set of problems fundamentally different from established staples or discretionary equities. Investors and customers are much more gun-shy in buying into penny stock company services. This barrier to entry is so substantial that many penny stocks fail completely, making any investment a losing proposition. Of course, some succeed but would-be investors have to be cognizant of the inordinately large probability of loss when going long on penny stocks.

Dividend stocks are certainly on the opposite end of the market from penny stocks, but are not limited to some consumer product companies. For this reason, dividend-yielding stocks cannot be directly compared to staple or discretionary product/service providers. Nonetheless, it is interesting to compare the S&P 500 Dividend Aristocrats Index, a collection of dividend-paying stocks with a record of success. The last ten years gives the same general shape of price moves as was evident with consumer staples and discretionary companies. A low of 267.30 in March 2009 and a very recent high of 1009.74 gives the dividend aristocrats index a gain of 742.442 points, or 377 percent increase from the low point that we take as initial investment. One thousand dollars invested in the dividend aristocrats index would have turned into about 3,770 dollars by now.

Not bad, but notice that this multi-sector dividend index still lagged consumer discretionary stocks. This is to illustrate an important point: diversification, taken to an extreme, can dilute returns as well as protect them from loss.

Highlights and Tips

Before wrapping up this article, general highlights about equities discussed here need to be emphasized:

• Dividends can be decreased or discontinued at discretion of company board of directors. Dividend policy is, by design, flexible and not inherently subject to appeal or revision by individual shareholders.

• Penny stock bid-ask spread can shave tremendous nominal gains from a trade and aggravate the losses just as much. Admittedly, all stocks have a bid-ask that works against the investor but liquid stocks have a very small spread that is trivial in overall gain/loss calculations.

• If investing in individual companies consider cash positions and shareholder value in context of broader capital structure.

That’s it for an incomplete sampling of several equity types. Interested readers and investors are welcome to leave a comment.

Questions, Comments, or Suggestions? Email me at ron.lewis@thenewsreflection.com

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