Nestle stock being up 36% this year so far is only part of the story. It’s the way that this stock has risen that is really impressive. Both the present and future look bright.
Nestle is the world’s largest packaged food company, and although they sell a lot of products in the United States, the company is actually located in Switzerland. Although the stock itself isn’t listed on American exchanges, Nestle can be traded by way of what are called American Deposit Receipts, or ADRs, which work the same way that owning stock does, including earning dividends, and this makes select foreign stocks available to American investors and traders.
There can actually be some advantages to having the primary stock of a company traded in other countries, and Nestle is in fact a perfect example of how this can be a good thing. To understand why this can be a benefit, we need to first understand how American stocks are connected and how a stock like Nestle can function apart from these connections.
Those who follow American stocks can easily attest to how much they move together, and this is no accident. We can just look at the developments in the markets this month to show this, with the concern about how the trade war is playing out with China in particular.
Your stock may have absolutely nothing to do with China, but its being tethered to a stock index is enough for it to be caught in whatever undertow that these concerns may have. There are other stocks in your index that are affected, and you share an index with them, and indexes are traded.
A lot of trading that goes on involves not trading individual stocks but baskets of them, the S&P 500 for instance. Trump tweets, people sell the S&P 500, your stock is in it, and your stock goes down along with the rest of them often times.
There also is a general mood that surrounds stock markets and if the market is not in a good mood, It may not even matter how well the company that you own stock in is doing because it will get caught up in this and people will sell your stock individually as well. Traders in particular will see this mood decline and this enough will make them a lot more likely to exit their positions and even go short your stock, and if enough traders do this, it is going down.
Nestle Simply is on Firmer Ground than U.S. Stocks
These traders don’t care a whit about business performance or fundamentals because they are only trading momentum, and it’s the traders and not the investors that drive most of the action day to day in the markets. Investors generally are just sitting on the sidelines when all this goes on and are in the audience so to speak while the traders are the players on the field who are scoring the runs and giving up the runs for the most part.
This is the biggest reason why momentum is so important to a stock’s outlook, and why fundamentals aren’t really reliable, because the people swapping the stocks between each other do not even pay much attention at all to such things. They do care about Trump’s tweets and when it looks like the mood is souring, they will sour it further, and when the mood is happy, they will make it happier.
While the same thing does go on in other countries, the U.S., being the trading hub of the world, is particularly influenced by traders. Nestle, on the other hand, isn’t so tethered to all of this and can have its great business outlook drive its stock price more than American stocks could ever hope to. They don’t have to deal with such big invasions from armies of traders who will spill the boat over the most trivial of things.
There are armies of analysts who don’t really get this though, and treat U.S. stocks more like they were a Nestle, and end up disappointed when their analysis doesn’t translate to the movements in stock prices that they expect. They may see a stock with earnings on the way up, and then rise even further, but the stock’s price may decline anyway, and this is because it’s not so much about earnings at all.
It’s not that any stock tracks its fundamentals, but when you are considering a stock that does a better job doing this and you’re looking to base your decisions on fundamentals, and when investing longer-term we need to take these things into account, then your analysis will be more reliable by going with a more fundamentally sensitive stock like Nestle.
Nestle investors aren’t going to be too scared the lower yields that we’ve been getting with treasuries lately, because these yields are high compared to Swiss government bonds for instance, which currently yield a negative 1%, not that any of this should matter to a stock’s price anyway. They also don’t really care about a trade war between the U.S. and China because they are not located in either country and their goods aren’t therefore subject to any of these trade sanctions.
Investors also aren’t worried about Nestle’s higher price to earnings ratio, now sitting at 24, and this is just indicative of the degree that the market is currently favoring the stock. We know that stocks in favor today are more, not less likely to be in favor tomorrow, and analysts expect this valuation to increase over the next while.
Nestle Has Performed Much Like a Utility Stock Lately, but One on Steroids
Even with this higher valuation, Nestle still pays a very nice dividend of 2.3%, which is well above average for a stock and especially stands out in the negative bond yield world that the company lives in. Thomas Russo of hedge fund Gardner Russo & Gardner, calls Nestle “a bond that comes with inflation protection and a venture-capital fund attached.” The firm puts their money where their mouth to the tune of $1.2 billion worth of Nestle stock.
Nestle is up 36% year to date, and perhaps even more impressively, has added 33% over the last 52 weeks, while the index it is in, the Stoxx Europe 600, has lost 2% over this time. The most impressive thing perhaps is how Nestle held its value during the last quarter of 2018 while just about everything else lost plenty. While U.S. stocks gave back 20%, Nestle’s losses during this time was only 3%. By January 9, it had made this all back and hasn’t looked back since.
During the pullback we had in May, with U.S. markets declining by 6%, Nestle instead put in a small gain. Over the last month, while U.S. stocks have dropped by 8%, Nestle is actually up by 5%. For people who want to sidestep the rough seas that we’re seeing lately, Nestle has been firmly planted on the ground all year and has also been moving higher and higher up the charts consistently.
It wasn’t always this way though, and Nestle went through a period of about 5 years, between January 2013 and January 2017, the stock price went nowhere. It didn’t lose money mind you, but it didn’t gain any either, and gaining is what we are after with stocks.
January 2017 saw the company hire a new CEO, and things have been moving forward ever since. Managing a company of this huge size with so much diversity is not an easy task, but current CEO Ulf Mark Schnieder has been more than up to the task, and the company’s business prospects have not only improved but are set to keep improving.
The move up since then therefore hasn’t been just a matter of improved optimism about the company and its stock, although that always plays a role, it is backed with real substance. Earnings growth is projected to rise by 7 to 8% over the next few years, and these are heady numbers indeed for any company and even more so for Nestle with their 153-year history and their almost $100 billion a year in revenue.
Nestle is one of the best-looking stocks in the world right now overall, with its stability, its high dividends, its consistent stock performance, its sound management, and its bright outlook for the future. Nestle trades more like a top utility stock than a consumer one, with the difference being that utility stocks just don’t go up anywhere near this nicely.
Nestle looks pretty delicious right now and as long as they keep this up, it’s even hard to imagine a better place to put your money period.