2023-04-21 03:06:15 ET
Summary
- PSCC is an ETF that tracks an index of small cap consumer staple stocks.
- Food, cleaning supplies, clothes, and other nondiscretionary retail are relatively non-cyclical and less sensitive to broader economic cycles.
- A defensive sector like this is a good investment in times of economic uncertainty, such as the current environment, but small caps may struggle.
I rate Invesco S&P SmallCap Consumer Staples ETF ( PSCC ) as a Hold. The ETF tracks an index of small cap consumer staple stocks, which are relatively non-cyclical and less sensitive to broader economic cycles. This is because people still need to buy food, clothing, and other essential goods even when the economy is struggling. This makes them a good investment in times of economic uncertainty, such as the current environment.
On the other hand, this ETF’s focus on small-cap companies may limit its performance potential, as small-cap companies are generally perceived as more volatile and riskier than large-cap companies.
Current Bull Case
PSCC invests in approximately 32 companies and is concentrated with over 50% in the top 10. That lopsided allocation is something I prefer, especially in an ETF that is narrowly focused to begin with.
During a recession, consumers may cut back on spending in other areas, such as luxury items, but they will still purchase essential goods. This relatively inelastic demand may provide PSCC some stability, as the underlying stocks may perform well compared to other industries.
Within PSCC, roughly 25% of its holdings are dedicated to personal care products, which may benefit from what is known as the " lipstick effect ." This phenomenon suggests that during economic downturns, individuals may indulge in small luxuries, such as personal care items, in lieu of big purchases. PSCC's largest overall holding is e.l.f. Beauty (ELF), which provides personal care products. e.l.f. Beauty's stock has seen significant growth, with a rise of over 50% year-to-date, while the S&P 500 has only increased by 8%, driven by Elf Beauty’s earnings beat in Q1. This is an example of how PSCC has the potential to outperformance during a recession.
Current Bear Case
Recessionary concerns are top of mind for most investors, myself included. Small caps have a reputation for being riskier than large caps because they are more volatile. This volatility is due to a number of factors: small cap companies are often less well-established than large caps and they have less liquidity. Additionally, small caps are often more cyclical than large caps. Furthermore, small caps tend to be more domestically focused than large caps, thus more exposed to the risks of a slowdown in the US economy.
PSCC has 40% allocation to food products, which is about as essential as an industry can be. However, PSCC's portfolio includes at least three food companies - TreeHouse Foods (THS), B&G Foods (BGS), and Calavo Growers (CVGW) - that are currently unprofitable. These companies are facing various challenges, including higher costs of raw materials, rising competition, and shifting consumer preferences, which have impacted margins across the food industry. This has eaten into margins across the food industry, but larger cap food companies may be able to pass on input costs more easily. Essentialness does not guarantee profits.
Price Trend Analysis
At the start of this month, PSCC’s 20-day exponential moving average [EMA] crossed its 50-day EMA. This is a bullish signal, known as a golden cross, which occurs when a shorter-term moving average crosses above a longer-term moving average. While I don’t make investment decisions based purely on technical analysis, it is encouraging to see this price movement.
Current Investment Opinion
I rate PSCC a Hold with a short-term investment horizon in mind. A defensive sector like PSCC could continue to do well this year if an economic downturn continues - PSCC has modestly outperformed the S&P 500 YTD. However, the small cap focus of PSCC will likely lead it to underperform a large cap consumer discretionary ETF.
For further details see:
PSCC: Small Cap Focus May Limit Returns Of This Consumer Staples ETF