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Consumer Staples: Lighten Your Load

By Richard Joy On May 13, Standard & Poor's cut its recommended allocation for the Consumer Staples sector to underweight, from marketweight. Given that Consumer Staples stocks have been among the weakest areas of the market so far in 2003, we at S&P believe investors should underweight their exposure to the sector, which now represents 11% of the S&P 1500 Super Composite Index. This move follows an earlier cut in recommended allocation in March, 2003, from overweight to marketweight (see BW Online, 3/6/03, "Consumer Staples: Don't Stock Up".)

We feel reduced earnings-growth expectations, selected areas of weakness, and increasing investor emphasis on growth-oriented stocks will likely limit near-term upside potential for Consumer Staples stocks. The weak spots are primarily the tobacco and retail food industries, which have terrible fundamentals right now. Cigarette makers are dealing with large state excise-tax increases across the country, a brutal price war with discount cigarette manufacturers, and a troublesome litigation environment. Supermarkets are being hurt by a sluggish economy and increased competition from Wal-Mart (WMT), wholesale clubs, and deep discount stores.

WINE AND DRUGS LEAD. So far this year through May 9, the S&P Consumer Staples Index fell 2.4%, vs. a gain of 5.9% for the S&P 1500 Index (a combination of the S&P 400, 500, and 600 indexes). Among the industries that make up the Consumer Staples Index, shares of tobacco outfits and food retailers have been the weakest performers, while distillers, vintners, and drug retailers have outperformed the market.

Despite the downgrade of our recommended allocation for the sector, we continue to like Alberto-Culver (ACV), Anheuser-Busch (BUD), CVS (CVS), Constellation Brands (STZ), Dean Foods (DF), PepsiCo (PEP), Procter & Gamble (PG), and Sysco (SYY). All are ranked 5 S&P STARS (strong buy), which means that we expect them to be the best performers and rise over the coming 12 months.

The weakness in the U.S. dollar compared with the euro may help some Consumer Staples companies. The household-products and personal-care groups will probably see the biggest benefits, while a few food concerns with substantial exposure to Europe -- such as H.J. Heinz (HNZ

; ranked 3 STARS, hold), Wrigley (WWY

; ranked 3 STARS), and Sara Lee (SLE

; ranked 4 STARS, accumulate) -- will probably also see some gains. Analyst Joy follows consumer staples stocks for Standard & Poor's

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