The Prudent Investor

Defending Against Volitility – Part 3
April 5, 2007, 7:25 am
Filed under: Consumer Goods

I hadn’t really planned to do a third part to this series, but when the DOW went up almost a percent on 19 March, and another half a percent the following day, I decided to take a look at the reactions to the companies under consideration during these upward spikes.

There have been four days since the beginning of 2006 where the DOW has gone up more than one and a half percent. Of note is that three companies actually declined at least once during those up days, but of significance is that the two smallest players not only rose higher than the DOW on half of the days, but both beat it over the course of all four days. None of the other companies came close to doing this.

  6/29/2006 6/15/2006  
DOW 10974.36 11190.8 1.97% 10817.48 11015.19 1.83%  
PEP 59.36 59.5 0.24% 58.99 59.08 0.15%  
UN 21.77 22.15 1.75% 21.2 21.46 1.23%  
CAG 21.99 21.89 -0.45% 22.08 22.09 0.05%  
MKC 33.5 33.59 0.27% 32.91 32.99 0.24%  
SJM 44.97 45.25 0.62% 40.22 40.07 -0.37%  
CPO 28.75 29.13 1.32% 26.59 27.5 3.42%  
FLO 27.68 28.11 1.55% 28.01 28.96 3.39%  
  4/18/2006 7/24/2006  
DOW 11074.58 11268.77 1.75% 10868.7 11051.05 1.68% 7.23%
PEP 57.79 58.08 0.50% 62.73 63.35 0.99% 1.88%
UN 68.63 68.77 0.20% 23.32 23.53 0.90% 4.08%
CAG 21.25 21.4 0.71% 21.83 21.88 0.23% 0.53%
MKC 33.4 33.23 -0.51% 34.77 34.91 0.40% 0.41%
SJM 39.06 39.24 0.46% 45.37 46.01 1.41% 2.12%
CPO 28.1 28.81 2.53% 29 29.09 0.31% 7.58%
FLO 28.55 29.21 2.31% 28.52 28.53 0.04% 7.29%

Thetakeaway here is to remember that bigger is not necessarily better. The larger companies may be more stable, but the smaller companies are more nimble.

With the next post I will begin looking at the seven companies under consideration individually. If all seven companies were a pie, then PepsiCo would comprise more than half of the pie. Looking at the remainder, Unilever would take up about three quarters, and again looking at what remains ConAgra Foods would comprise about half of that. So in the mix are three large and four small companies. This is like comparing oceanliners with sailboats, the large companies have the advantage of being steady and remaining afloat, while the smaller ones have more maneuverability.

I will state that I owned PepsiCo a number of years ago. About a dozen years ago I decided to invest in stocks in an attempt to help my children with college expenses well in the future. I asked my daughter which company she wanted me to invest in and she decided upon PepsiCo. The conversation with my son was a little different – he first selected Playboy, but I told him that his mother probably wouldn’t allow him to look at the annual report. His next selection was Nintendo, but they were not available on the New York Stock Exchange. Finally, he looked at my printer and selected Hewlett-Packard, which did quite nicely. I saved enough shares to open a DRiP in my daughter’s name, and she still owns shares in the company.


2 Comments so far
Leave a comment

If considering PEP why not look at KO as well?

Coke is not listed by Yahoo in the Processed & Packaged Goods Industry.

But PEP and KO are generating most of their net incomes from the same products… (although KO does not produce potato chips and other snacks)

So in the real world they are competing against each other on many fronts, they are the two giants in their industry, and should be compared.

Comment by bob from the DRiP board

Hi Bob. As a descendant of the Candlers (my father’s mother), I actually was thinking about including it as a possible excuse for once again owning the stock.

However, I am trying to take as much personal bias out of the mix as I can. I agree that Coke and Pepsi “should” be compared, as that also makes sense to me, but I think that there would be a better argument for this if I were examining the Beverages – Soft Drinks industry.

There’s just no way I can pretend that Coke could be aligned with Processed & Packaged Goods. Indeed, some websites place Pepsi in the Beverages – Soft Drinks industry, which makes more sense to me – this will be seen when I examine each company to see how they make their money.

That said, I decided to use the groupings established by Yahoo, and for whatever reason, they included Pepsi in the Processed & Packaged Goods industry, so I am following the way they have put things together to remove any bias on my part.

Comment by glsmyth

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