It's no secret that defensive industry sectors like consumer
staples and utilities have been leading major U.S. stock market
benchmarks to all-time new highs. But have stocks in these sectors
The Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP)
tracks 42 companies within the S&P 500 involved in food and
beverage, drug retailing, household, and personal consumer
Among the stocks within XLP that have valuations exceeding the
broader market include Hershey (
) with a P/E ratio of 29, Colgate-Palmolive (
) at 23, and Kellogg Co. (
) at 23. By comparison, the SPDR S&P 500 ETF (NYSEARCA:SPY)
carries a P/E ratio of around 15.
The list of boring consumer stocks selling at a premium to the
market has pushed the entire staples sector to a P/E level over 17,
according to Alta Vista Research. That makes XLP the richest valued
sector among the SPDR ETFs tracking the other eight S&P 500
The P/E or price earnings ratio measures stock valuations. It's
calculated by taking a stock's market price divided by its annual
earnings per share.
For instance, if a company is currently trading at $40 a share
and earnings over the last 12 months were $1.50 per share, the P/E
ratio for the stock would be 26.66 ($40/$1.50).
Currently, consumer staples represent around 11.15% of the
Another defensive sector, utilities (NYSEARCA:XLU) which makes up
just 3.65% of the S&P 500, also trades at a premium. The
Utilities Select Sector SPDR ETF (
) owns 31 stocks involved in generating and distributing both
electric and natural gas power. XLU has gained 18.48% since
the beginning of the year and has a P/E ratio of 16.7.
Overstretched valuations alone are not necessarily a sell
signal. But properly used in conjunction with other indicators, it
most certainly raises cautionary red flags.
The May 2013 issue of the
Profit Strategy Newsletter
examines the fundamental and technicals for ETFs linked to major
asset classes. It includes our short list of mega investment
themes, top performing and yielding ETFs, along with our popular
Technical Forecast that's updated several times per week.