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Even after rally, consumer staples still attractive

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Our valuation check-up on major equity market sectors continues with the high-flying S&P/TSX Consumer Staples Index. For a change we have good news – despite recent strong performance, the sector remains fairly valued.

Loblaw's strong quarterly earnings results Thursday highlights a Canadian consumer staples sector that – somewhat below the radar – has performed remarkably well over the past three years. The three year average annual return of 20 per cent ties it with the telecommunications sector, lagging only the largely-irrelevant (because it only has two companies) S&P/TSX Health Care sub-index.

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The stocks have run, but the sector is still not expensive in terms of forward earnings multiples (price to earnings based using average analyst earnings estimates for the next 12 months) (See chart).

The Consumer Staples index is currently trading at 16.1 times earnings estimates. This is a mere 0.5 higher than May of 2010, when the sector began a 56.4 per cent rally. The fact that the stock price surge has not made the sector more expensive indicates that companies have been able to grow earnings – a rally with flat earnings would have caused the price earnings multiple to jump to prohibitive levels.

In terms of valuations, investors in Canadian consumer staples stocks have few reasons to take profits. For those without investments in the sector, we have included a bar chart with index members (link to table) with some brief valuation information as a starting point for future research.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB .

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Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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