Source: Longtermtrends

Investors can’t ignore this, but the issue is what they should do about it. And the answer isn’t necessarily to start selling shares – or even to stop buying.

Stock market crash

It’s almost impossible to ignore the similarities between the stock market in 2000 and today. The rise of artificial intelligence looks a lot like the emergence of the internet.

The casualties from the dotcom crash were huge. Some stocks fell more than 90% and investors who bought them at their peaks are still waiting for them to recover.

Outside of tech, there were shares that didn’t just hold their value, but actually went up as investors looked for safety. These were stocks in sectors such as consumer defensives and utilities.

One strategy for investors looking for US stocks in the current market is therefore to look outside of AI for potential stability. But I think this is a risky approach that needs handling with care. 

Going defensive

One of the stocks that fared well in the 2000 crash was Procter & Gamble (NYSE:PG). There are obvious reasons why – it has a strong position in a market where demand is steady.

The stock could hold up well if the market sells off again. But it’s underperformed the S&P 500 since 2000 and investors need to decide whether this is a true long-term opportunity. 

Revenue growth over the last decade has been below 2% a year. And the stock trades at a price-to-earnings (P/E) ratio of 22, which isn’t exactly cheap. 

That’s not a criticism – growth opportunities just haven’t been there in recent years. But investors need to think about the stock as a long-term investment not just short-term speculation.

Staying the course

When thinking about the crash of 2000, it’s easy to forget that the best move for a lot of investors was to stay put. Amazon (NASDAQ:AMZN) is a great illustration of this. 

The company’s share price fell over 95% when the dotcom bubble burst. But even investors who bought at the very top are up more than 14,000% on their investment just by holding on since then. 

There’s a good reason for this. Amazon has taken a disciplined approach to value creation for shareholders. Its online platform has created a dominant position by focusing on the long term.

By aggressively focusing on customers, it’s established a scale that makes it almost impossible for other businesses to compete with. And the rest has followed from there over time. 

What I’m doing

I hold Amazon stock and the company is right in the thick of the AI spending. And there’s a real risk that this might not pay off if demand doesn’t materialise as expected.

In that situation, the share price might go down. But I’m a buyer, rather than a seller, at today’s levels – even with the S&P 500 at historically high valuation levels.

To my mind, the lesson of history is pretty clear. Investors who can identify businesses with long-term competitive advantages don’t need to worry about short-term stock market crashes.

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But the latter isn’t entirely out of the question if consumers suddenly get hit with a wave of tariff-related price hikes. So let’s assume the worst and say a US stock market crash is coming. So which stocks might protect an investment portfolio?

3 ‘crash-proof’ investments?

No stock is ever truly crash-proof. Even if the underlying business continues to perform well while the wider market suffers, panicking investors often throw the baby out with the bathwater, sparking volatility, at least in the short term.

While unpleasant, this volatility does create lucrative opportunities for investors with cooler heads. And looking back to previous crashes and corrections, there are several S&P 500 stocks that have demonstrated their resilience.

As a discount retailer, Walmart (NYSE:WMT) often sees a surge in demand as consumers start hunting for bargains. In fact, we’ve already begun seeing early signs of this within the group’s latest results, which show strong like-for-like sales growth while more ‘premium’ peers fall behind.

Then there’s AutoZone (NYSE:AZO), a leading supplier of automotive parts and components. Regardless of economic conditions, people need their vehicles to get around and go to work. And since most consumers typically delay buying new cars during recessions, rising demand for spare parts for DIY repairs creates favourable headwinds.

And continuing the theme of non-discretionary spending, Procter & Gamble (NYSE:PG) is another S&P 500 stock with a knack for being resilient. Demand for its essential household brands such as Oral-B, Ariel, and Pampers tends to remain high, thanks to relatively stable sales of its healthcare, homecare, and babycare products.

Nothing’s risk-free

These three businesses appear to be well-positioned to deliver robust results in a post-tariff world. However, it’s important to recognise that none of them are guaranteed winners.

Walmart’s still susceptible to tariff-related impacts throughout its supply chain that could put pressure on margins. The company might be able to pass some of this cost onto consumers, but with its reputation built on being a cheap retailer, there’s a limit to this strategy, potentially harming earnings.

Procter & Gamble’s in a similar situation, where higher raw material prices could squeeze profitability. Even with strong brands, its ability to pass on costs could be limited by the rising number of cheaper private-label alternative products that shoppers can switch to.

As for AutoZone, the company could also encounter some issues. Consumers may opt to switch to public transportation if their cars stop working. The firm may also see a reduction in the frequency of non-essential repairs, creating some growth headwinds.

The bottom line

Each of these S&P 500 enterprises has a long track record of navigating through even the worst economic storms, including the global economic meltdown in 2008. Therefore, despite the potential challenges, investors concerned about a looming recession may want to consider investigating these businesses as a way to diversify their portfolios.

The post 3 S&P 500 stocks that could survive a stock market crash! appeared first on The Motley Fool UK.

Misfiring strategy

At the heart of the company’s recent problems is a baffling, complicated strategy. A few years ago, star investor Terry Smith accused it of being more interested in sustainability credentials than building shareholder value.

The ‘woke’ agenda may have been expunged since then but its overarching strategy didn’t change much. Unlike its bitter rival Procter & Gamble, it still relies heavily on a number of food brands and volatile emerging markets.

The new CEO looks determined to cull the company’s behemoth portfolio. In an interview in early March he stated that the business has identified around €1bn of local brands in Foods Europe that “don’t fit well with the portfolio” and are not “strategic priorities”. His intention is to act on these at “pace”.

Back to basics

I believe that the intention behind the new strategy is to replicate a similar one P&G undertook some time ago.

Wind the clock back 10 years and P&G was in the same boat Unilever finds itself in today. It was losing market share to smaller more nimble rivals. I remember the issues Gillette had when the Dollar Shave Club was launched, to provide one example.

What did it do? It went back to basics, to its core brands. Its new strategy of ‘irresistible superiority’ was so simple that many analysts at the time saw it as nothing more than a meaningless mantra. But it worked. Since 2015, its share price has doubled and its market cap is now much bigger than its main rival.

Consumer squeeze

One of the biggest challenges the company faces in the next few years is one of cash-strapped consumers tightening their belts. In some instances this means switching to cheaper brands.

The US is by far its biggest market, accounting for nearly 40% of its entire turnover in 2024. The US stock market might be booming, but its consumers are not. The cost of living in the US has shot up recently. Elevated inflation has meant that the value of the dollar is 30% less than it was four years ago.

Now with the talk of tariffs and trade wars, people fear that the US is heading for a recession. To me, the company cannot afford to stand idly by doing nothing as it is likely to get steam rolled in the coming years.

There is definitely value in Unilever. Its many world-leading brands speak for themselves. The new CEO may be known as the hair brand guy, but I expect a cull at virtually every category of its portfolio. He has, after all, done it before.

At the moment, I have significant exposure to a much smaller consumer goods business, PZ Cussons, so I won’t be buying. If I didn’t, I wouldn’t hesitate to snap some up.

The post What on earth’s going on with the Unilever share price? appeared first on The Motley Fool UK.

Procter & Gamble

Over the past 10 fiscal years, Procter & Gamble’s dividend has increased substantially, rising from $1.80 per share in fiscal year 2010 to $3.03 per share in fiscal year 2020. Management has also returned a lot of capital back to shareholders, with the company returning around $135bn of value to shareholders over the past decade through a combination of dividend payments and share repurchases and exchanges. In the second quarter of fiscal 2021, the company returned $5bn in capital alone, with $2bn in the form of dividends and $3bn in terms of stock repurchases.

Over the past 10 years, Procter & Gamble stock has more than doubled due to a combination of dividend increases, capital returns, and the company’s overall strength as a result. If inflation remains about the same, I believe the stock could approximately double again. If inflation is higher than expected, I think Procter & Gamble could do even better given the company’s pricing power. With the expected price increases of existing products, overall market growth due to rising incomes, and potential productivity increases due to improving technology, I believe Procter & Gamble will continue its strong fundamental performance into the future.

With that said, there are still challenges. Unemployment is high in many places in the world and the pandemic remains ongoing. The long-term shift of commerce to digital could bring a new set of competition and management will need to continue to execute for its stock to do well.

Unilever

Like Procter & Gamble, Unilever shares have also more than doubled over the last 10 years as the company has continued to grow its customer base and build its portfolio of leading brands. As of 2021, Unilever certainly has a lot of both, with 2.5bn customers spread across 191 countries and a portfolio of 13 brands that do more than €1bn in sales each year.

Unilever also does well in countries that could grow substantially in the future. The company has the number one market position (among fast growing consumer goods companies) in India for example, and it also has a €3bn a year business in China. As those giant economies continue to develop, I think Unilever’s business in those countries and developing markets in general will likely continue to grow. If Unilever’s business grows, I think its stock price could benefit. Given the company’s potential, I think the stock could double again over the next 10 years.

Like Procter & Gamble, the long-term shift of commerce to digital could bring new competition to Unilever and management will need to continue to deliver the results that the market expects in order for the stock to do well. If margins or demand is weaker than expected, Unilever shares could have potential downside.

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WASHINGTON, DC — The last few months have been a busy for Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A.US) (NYSE: BRK-B.US ) and today we learned its buying spree continued.

It was announced yesterday Berkshire has come to an agreement with Procter & Gamble (NYSE: PG.US) to buy battery manufacturer Duracell in exchange for the $4.7 billion worth of Procter & Gamble shares Berkshire held.

The details

At the end of June, Berkshire held roughly 53 million shares of Procter & Gamble worth nearly $4.2 billion, and since then P&G has seen its stock rise by almost 15%, explaining the $4.7 billion price tag.

When P&G released its earnings for the first quarter of fiscal 2015, it also announced that it would be exiting the Duracell business, preferably through the creation of a stand-alone company. At the time of the announcement, P&G’s CEO A.G. Lafley said:

“We greatly appreciate the contributions of our Duracell employees. Since we acquired the business in 2005 as part of Gillette, Duracell has strengthened its position as the global market leader in the battery category. It’s a business with attractive operating profit margins and a history of strong cash generation. I’m confident the business and its employees will continue to thrive as its own company.”

Then, P&G noted the reason behind the move was “consistent with its plans to focus and strengthen its brand and category portfolio,” and that “its goals in the process of exiting this business are to maximize value to P&G’s shareholders and minimize earnings per share dilution.”

Today, P&G noted that the $4.7 billion price tag for Duracell would represent an adjusted earnings before interest taxes and depreciation, or EBITDA, of seven-times fiscal year 2014’s.

The rationale 

So, why would Buffett make such a move?

First, as highlighted by many news outlets like Bloomberg, similar to Berkshire’s previous deals in acquiring an energy subsidiary from Phillips 66 earlier this year, by exchanging P&G stock for the entirety of Duracell, Berkshire will be able to abstain from paying any capital gains taxes as if the P&G shares had been sold for cash.

Considering that the P&G stake stood on Berkshire’s books at a cost basis of just $336 million at the beginning of this year, the tax savings alone are a compelling value proposition for Berkshire Hathaway and its shareholders.

Also, knowing at heart Buffett’s always been a proponent of buying businesses at an appropriate price, the fact that the market traded at an 11.5-times EBITDA multiple in January of this year, according to the Stern School of Business at NYU, and the consumer electronics industry traded at nine-times EBITDA, then the $4.7 billion price tag seems more than reasonable.

In last year’s letter to Berkshire Hathaway shareholders, Buffett wrote that “more than 50 years ago, Charlie [Munger] told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.”

So, the consideration of the deal must extend beyond just the financial aspects of it. And Buffett’s words regarding the deal are quite telling.

In today’s announcement Buffett said:

I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette. Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway.

It is of note that Buffett mentioned the Duracell brand first. One of my favorite Buffett quotesis:

“Buy commodities, sell brands” has long been a formula for business success. It has produced enormous and sustained profits for Coca-Cola since 1886 and Wrigley since 1891. On a smaller scale, we have enjoyed good fortune with this approach at See’s Candy since we purchased it 40 years ago.

And how is this applicable to Duracell?

Consider for a moment in its ranking of the Best Global Brands in 2014, Interbrand estimated that the brand value of Duracell stood at $4.9 billion, ahead of MasterCard ($4.8 billion) and narrowly trailing both Chevrolet and Ralph Lauren.

Said differently, Buffett paid less for Duracell — the company — than what one company estimated its brand value alone is worth.

Also, it isn’t just the Duracell brand that is compelling, but its business, too. P&G noted in its annual report that Duracell maintains over 25% of the global battery market share. And Interbrand noted in its report on the company:

“Duracell continues to respond to consumer demands through innovation and new product launches. New technologies in rechargeable batteries, longer lasting energy storage times (Duralock) and synergies with wireless iPhone charging (PowerMat) demonstrate responsiveness to a changing marketplace. Duracell is working to further increase its presence by forging retailer-specific partnerships and nudging competitors out of view in the process.”

Clearly, the company isn’t afraid of innovation, and it is responding to changing demands and desires of consumers.

The charge to the bottom line

We don’t know the details of how Duracell will fit in the massive empire that Berkshire Hathaway has become. But there is one thing we do know — to the delight of Berkshire’s shareholders — all signs indicate that Buffett has once again found another wonderful business at a fair price.

The post Why Warren Buffett Bought Duracell For Nearly $5bn appeared first on The Motley Fool UK.

Today, I’m considering whether FTSE 100 consumer-goods giant Unilever (LSE: ULVR) (NYSE: UL.US) is a wonderful company, and whether its shares are trading at a fair price.

A wonderful company?

Buffett loves big, powerful businesses with great international brands. Which is why you’ll find Coca-Cola, Wal-Mart and Procter & Gamble (NYSE: PG.US) among the top six holdings of his Berkshire Hathaway investment company.

Procter & Gamble (P&G) is the world’s biggest consumer-goods group — and Unilever’s arch-rival. How does Unilever measure up against P&G for brand strength? Supremely well, according to brand-researchers Kantar.

P&G has eight brands in Kantar’s global top 50, led by Pantene at number seven. Unilever easily surpasses that with 15 top-50 brands, including three — Lifebuoy, Knorr, and Dove — in the top 10.

A high return on equity (ROE) is another Buffett hallmark of a wonderful company. P&G delivered a decent ROE of 16.6% for its latest financial year; but Unilever posted 29.6%.

Now, before we get too excited, Buffett doesn’t like to see too much debt at a company; and debt can inflate ROE. P&G and Unilever both have debt, but if we leave out the ‘equity multiplier’ component (the effect of debt) from their ROEs we can see how much each company would have earned if it were debt free.

In P&G’s case, 8.1% of its ROE was due to profit margin and asset efficiency, while 8.5% was due to returns earned on the debt at work in the business. In Unilever’s case, 9.7% was due to margin and asset efficiency, and 19.9% to debt.

Clearly, Unilever is doing a good job for shareholders of increasing the return on their equity by the use of debt. But also, on a debt-free basis, still comes out ahead of P&G. That leaves the question of whether Unilever’s debt is too high for it to be considered a wonderful company.

I don’t believe Buffett would view Unilever’s level of debt as an issue. Net gearing of 51% is higher than P&G’s 38%, but still perfectly reasonable. In fact, Unilever’s gearing is exactly the same as a UK share Buffett already happens to own!

A fair price?

Buffett values businesses as if he was buying the whole company.

EV/EBIT (enterprise value divided by earnings before interest and tax) is a simple whole-company metric that Buffett uses for a quick take on valuation. EV — a company’s market capitalisation, plus net debt (or minus net cash) — is the price he would have to pay to buy the whole company debt-free.

At a share price of 2,366p, Unilever is on an EV/EBIT of 12.6. This rating compares favourably with P&G’s EV/EBIT of 15.1. Therefore, I’d say Unilever not only measures up on Buffett’s key wonderful-company qualities, but also currently trades at a fair price. 

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