Get Out of Consumer Discretionary Stocks, Morgan Stanley Urges

The economic recovery is moving into its mid-cycle, and that means investors are wise to shift into consumer staples and high-quality stocks—and out of consumer discretionary names. So says Mike Wilson, chief equity strategist at Morgan Stanley.

While admitting in a research paper that this switch had aroused client “pushback” from an earlier mention of it, Wilson argued that discretionary stocks are getting pricey and staples are not.

To him and his analysts, that betokens a new phase of the economy’s journey. The staples, he contended, are better suited to managing through any inflation, which many on Wall Street anticipate. Although staples shares can suffer under inflation, discretionary stocks—such as cars, housing, and appliances—are even worse off, he added.

While long-term rates have risen, and likely will climb more, Wilson indicated that the share-price impact on staples should be more muted going forward. “The rate shock is no longer a shock anymore,” he said. “It’s a ‘known’ known at this point.”

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“We’ve had historical outperformance in the last 12 months,” he told CNBC, speaking of consumer discretionary, as he released his report. “So it’s time to rotate away from those types of securities and into areas that have higher quality, and staples fits the bill in that regard.”

This economic cycle is moving at a quicker pace than usual, he declared. “What we see in front of us is a cycle that’s progressing at about two times as fast as it normally does, which means we’re going to be moving from the early-cycle phase of the recovery to the mid-cycle part of the recovery.”

Part of that picture, Wilson said, should be a tilt to “higher-quality stocks.” By which he means steady companies with solid earnings and wide moats, those that have proven their worth over many years. These also must embody “growth at a reasonable price,” or GARP, meaning more affordable share prices.

“They’ve really underperformed, which is typical in the early cycle part of the recovery. Now the quality factor is going to start to work again,” said Wilson, who is also Morgan Stanley’s chief investment officer.

Alphabet, the parent of Google, is one such “quality” stock that by the most common metric, the price/earnings ratio (P/E), is on the expensive side: 36. But Morgan Stanley prefers enterprise value (stock value plus debt minus cash) to sales. This ratio works out to 7.6, which to Morgan Stanley deems to be acceptable.

Among the staples the firm likes are supermarket chain Kroger (year-to-date stock growth, 16.7%), household products purveyor Kimberly-Clark (2.9%), and public utility Entergy (3.4%). Only Kroger exceeds the S&P 500’s average of 8.5%, and not by any huge amount. The P/Es of the trio of staples stocks are all below the market’s: with Kroger at 11, Kimberly at 20, and Entergy at 15.

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Tags: Alphabet, consumer discretionary, consumer staples, Entergy, high-quality stocks, Kimberly-Clark, Kroger, mid-cycle, Morgan Stanley, Stock Market, Stocks

Laura Tuttle

Boston Family Advisors, a wealth management firm that specializes in creating single family offices, has named Laura Tuttle and Warren Gibbon as its new co-CIOs, which became effective April 1.

Tuttle was most recently a director at multi-family office SCS Financial, where she had worked since September 2018. Previously, she had a 12-year stint at Cambridge Associates, where she was a managing director in the company’s private client practice. Prior to Cambridge Associates, Tuttle was an investment analyst at FLAG Capital Management and before that was an analyst at Thomas Weisel Partners.

Warren Gibbon

“We are thrilled to bring on Laura, whose entrepreneurialism and deep investment knowledge will further cement us as an institutional-quality adviser,” Nicholas Hofer, founder and president of Boston Family Advisors, said in a statement.

According to Boston Family Advisors, much of Tuttle’s career has focused on alternative investments for high-net-worth individuals, families, endowments, and foundations. She is also experienced at administering various trust instruments, guiding family clients through generational shifts, and developing customized investment strategies. The firm also said Tuttle has spent several years building female-focused mentorships, resources, and networking programs at her previous firms.

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“I am excited to partner with this stellar team and investment committee to help our clients build legacies of wealth and create lasting impact through their investment portfolios,” Tuttle said in a statement.

Gibbon, who joined Boston Family Advisors in February 2020 as chief investment strategist, has been promoted to co-CIO simultaneously with Tuttle joining the firm.

Before he joined Boston Family Advisors, Gibbon was interim chief financial officer at software firm Voicify, and prior to that he was an investment director and portfolio manager at Aberdeen Standard Investments. Before Aberdeen, Gibbon was a senior equity analyst and portfolio manager at BNP Paribas Investment Partners.

Gibbon started his career as an equity research analyst at Fortis Investments.