Better Buy: Clorox Stock or the Entire S&P 500?

To say they’re dishing out disparate performances is something of an understatement. The S&P 500 Index (SNPINDEX: ^GSPC) is up 38% over the past 52 weeks, while share prices of Clorox (NYSE: CLX) are down 14% for the same timeframe. Clorox is the S&P 500’s third-worst performer for the year-long span. Assuming the recent past is a glimpse of the near future, the hint is crystal clear — plug into the broad market and take a hard pass on the bleach maker.

This easy-to-embrace way of thinking, however, ignores an important investing adage from none other than Warren Buffett — the Oracle of Omaha — who says “be fearful when others are greedy, and greedy when others are fearful.” Investors comparing a position in Clorox to an index fund right now would be wise to act on both tenets simultaneously.

Image source: Getty Images.

Why Clorox?

Surprised to learn Clorox has been such a laggard of late? After all, consumers looking for off-the-shelf coronavirus disinfecting solutions couldn’t get enough of the company’s namesake product for the better part of 2020. Revenue for the quarter ending in September was up 27% year over year, mirroring sales growth in the couple of quarters before and the one quarter after that peak. Top-line (and bottom-line) growth has contracted in the meantime, but one should consider the tough comparison. Shares were still falling most of that time, tumbling 26% from last July’s peak of around $238 a share to the 52-week low near $175 hit last week.

The action suggests the market had little confidence that Clorox stock’s pandemic-driven rally from the first half of last year had any staying power, given the inevitable sales headwind on the horizon. And technically speaking, those concerns weren’t misguided.

Those doubt-driven sellers, however, overshot their bearish target. A rebound is arguably more likely than more selling.

Part of this bullish argument here lies in the stock’s current dividend yield. It stands at just a bit above 2.6%. While it’s been higher, it’s not been consistently higher than that level since 2014. Newcomers can plug into its dividend — a dividend that’s been upped every year for the past 43 years — at a payout rate not offered very often for very long.

The dividend-based thesis is bolstered by the underlying earnings outlook.

Sure, Clorox’s original fiscal 2021 guidance tendered in August only called for modest single-digit percentage sales and earnings growth. Revised full-year estimates now call for revenue growth of between 10% and 13% though, which should drive per-share profit growth on the order of 1% to 4%. That pushes the post-COVID sales and earnings slowdown into fiscal 2022.

Largely overlooked by investors, however, is how much of the company’s IGNITE strategy has been implemented in just the past few months despite the pandemic. For instance, stronger products were unveiled, like its “Glad to be Green” trash bags and Kingsford wood grilling pellets.

It’s still not entirely clear to what extent these and other initiatives have attracted consumers and turned them into loyal customers. But, it is encouraging to know that part of IGNITE’s strategy is customer-minded rather than being entirely product-minded, even if it might take until 2022 to fully realize the upside of this nuance.

Why not the S&P 500

Don’t misread the message. Building a portfolio around a core position in an index fund like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) still makes plenty of sense for most long-term investors. The odds of outperforming with regular buying and selling of individual stocks are actually pretty low; a simple index fund sidesteps the problem.

If there was ever a time to try out a different track, this is it.

The short version of the long story: The S&P 500 began May already well overbought, and became more overbought in the six weeks between then and now. Normally by mid-June the index would be up 5.3% for the year and headed into a particularly lethargic phase. This year it’s up 12.8%, and ripe for profit-taking.

Data source: Thomson Reuters. Chart by author.

This unusual strength through this point of the year isn’t ironclad evidence that a correction is in the works, of course. Anything can happen, and eventually, anything will happen.

From an odds-making perspective though, more marketwide gains without some sort of pullback first looks like the lower odds trade here.

Yes, bet against the crowd

Admittedly, stepping into Clorox stock here feels a bit like you’re trying to catch a falling knife. At the same time, it seems as if the overall market can do nothing besides go up, up, and up some more. Good news is treated like the good news it is, while bad news is given a bullish spin, also lifting stocks.

Don’t be too quick to assume these two trends are going to last forever though. In fact, the more it looks like they can’t do anything but continue on as is, the closer we inch toward a reversal … on both fronts. Value is always (eventually) priced in.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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