Source: PaxForex Premium Analytics Portal, Fundamental Insight
Recently, it has become more and more probable that the US economy is heading into a recession. Analysts expect S&P 500 earnings in Q1 2023 to be down 6% from a year ago.
Usually in such tough times, investors turn to defensive, recession-resistant companies like Procter & Gamble. In the past six months, that company's stock is up 20%.
But there's an argument to be made that a popular and reliable stock like Procter & Gamble can have a negative impact on your portfolio. The following is why investors should think carefully before buying a stock.
Can anyone really think that way? It's a fair question - Procter & Gamble is a blue-chip stock, a legendary dividend payer that has thrived for decades as a beacon of stability on Wall Street. Consumers buy its countless products under dozens of well-known brands such as Tide, Pampers, and Crest, totaling more than $80 billion a year.
This company is considered a boring business, but it has proven to be a great investment if given time. Since the early 1990s, the stock has outperformed the S&P 500 by about 2:1 if you reinvest the dividends. No, no one is denying Procter & Gamble's greatness or track record. On the contrary, there is a time and place for everything, and this is not Procter & Gamble's time.
The appeal of a company like Procter & Gamble is consistency. A company that sells toiletries rarely shows staggering growth, but it will perform in good times and bad. Analysts expect low to mid-single-digit earnings per share (EPS) growth.
The near-term outlook for the S&P 500 is not so good. In January, analysts predicted that the index would grow about 4 percent in 2023. But the latest sentiment seems increasingly negative; first-quarter earnings could be down 6 percent from a year earlier.
Based on that assumption, it's easy to see why Procter & Gamble stock is in high demand -- investors are getting above-market growth (at least for now) and a solid 2.4 percent dividend yield. You're paying for the bird in the hand - not two in the bush.
But this could backfire when the economy stabilizes and the next bull market begins. Investors may no longer pay such a premium for slow and steady stocks like Procter & Gamble. There is a big gap between Procter & Gamble's valuation, the forward price-to-earnings (P/E) ratio is almost 26, and the S&P 500's is 18.
Suppose the market overvalues Procter & Gamble closer to the S&P 500. The company's earnings per share would grow 7% per year (higher than analysts' estimates) through 2028 to trade at today's share price at a ratio of 18. That's even without taking into account the likely earnings growth of the S&P 500 over that time.
In other words, you could say that Procter & Gamble's safety as an investment has caused the company's stock to be priced so that its growth probably won't be justified for the next few years. It is quite possible that Procter & Gamble will withstand a potential market crash better than most stocks, but could fall far short of the S&P 500 when the next bull market begins.
As long as the price is above 145.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 150.59
- Take Profit 1: 153.00
- Take Profit 2: 157.00
Alternative scenario:
If the level of 145.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 145.00
- Take Profit 1: 143.00
- Take Profit 2: 140.00
