When Market Sentiment Skews Away, Smart Investors Look Closer: Hidden Gems in Consumer Staples and Steel
In today’s market frenzy, many investors chase the latest tech darlings or cyclical boom stocks, often overlooking sectors that quietly harbor significant upside potential. Aaron Dunn, co-head of value equity at Morgan Stanley Investment Management, recently spotlighted two such opportunities on CNBC’s “Power Check” — Clorox and Steel Dynamics. His insights reveal not just isolated stock picks but broader thematic trends that savvy investors should consider as part of a resilient, forward-looking portfolio.
Clorox: Defensive Innovation Amid Sector Neglect
Clorox’s stock has taken a beating this year, down over 24%, dragged down by a wider slump in consumer staples. The sector now comprises a mere 5% of the S&P 500 — its lowest weighting since the tech bubble of the early 2000s. This is a contrarian red flag and an opportunity wrapped into one. Why? Because consumer staples, especially companies like Clorox, offer defensive ballast when markets get volatile.
Dunn highlights Clorox’s ongoing transformation — a five-year overhaul focused on supply chain efficiency and inventory management, including a sophisticated new ERP system launched in fiscal 2022. These operational improvements are crucial in an era where inflation pressures and supply disruptions have rattled many peers. Unlike many staples firms grappling with food deflation, Clorox’s product mix sidesteps this issue, adding to its relative stability.
From an investment standpoint, Clorox’s valuation now looks compelling. It’s trading at a discount not fully justified by fundamentals, signaling potential for a rebound. This is a classic value setup: a well-managed, innovative company in a sector temporarily out of favor, poised to outperform if the broader market corrects from its all-time highs. For advisors, this means revisiting staples allocations — not to chase yield blindly but to strategically add quality names that can serve as a hedge.
Unique Insight: According to a recent report from Morningstar, consumer staples ETFs have seen outflows exceeding $2 billion in the past quarter alone, underscoring investor skepticism. Yet, companies like Clorox with strong innovation pipelines and cost controls are positioned to buck this trend. Advisors should consider selective rebalancing into these names now, before sentiment shifts.
Steel Dynamics: Positioned to Ride the Infrastructure Wave
Steel Dynamics offers a compelling play on America’s infrastructure ambitions. Protected by Section 232 tariffs, which shield domestic steel producers from cheaper imports, the company stands to benefit as construction activity and federal infrastructure spending pick up.
Dunn’s bullish case hinges on a few key points: rising CEO confidence, easing credit conditions, and the backlog of projects needing steel. Steel Dynamics’ low-cost, variable production model makes it well-equipped to capitalize on a demand surge. The company’s aggressive share repurchase program — buying back 25% of its shares over the last four years — signals strong cash flow and shareholder-friendly management.
Year-to-date, Steel Dynamics has gained nearly 11%, yet the broader infrastructure push suggests this is just the beginning. The recent $1.2 trillion Infrastructure Investment and Jobs Act is expected to drive sustained steel demand over the next decade, with the American Iron and Steel Institute projecting a 3-5% annual growth in domestic steel consumption.
Actionable Advice: Investors should monitor leading steel producers like Steel Dynamics as barometers of infrastructure momentum. Advisors might consider increasing exposure to steel equities within industrial or materials allocations, particularly if early economic indicators confirm a construction rebound. Additionally, tracking tariff policies and trade negotiations remains critical, as any easing could impact margins.
What’s Next? Strategic Portfolio Adjustments
The current market environment — marked by high valuations in growth stocks and rotation out of defensive sectors — demands a nuanced approach. Here’s what investors and advisors should consider:
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Reassess Defensive Staples: Don’t write off consumer staples entirely. Look for companies with strong innovation, operational improvements, and pricing power. Clorox exemplifies this blend and could serve as a portfolio stabilizer amid volatility.
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Capitalize on Infrastructure Trends: Steel and related industrial sectors are poised for growth driven by policy tailwinds. Steel Dynamics is a prime example of a company well-positioned to benefit from this secular trend.
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Value in Out-of-Favor Sectors: The low weighting of consumer staples and the recent pullback in steel stocks present a classic value opportunity. Investors prepared to look beyond headline tech and growth names can find asymmetric upside.
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Monitor Macro Signals: CEO confidence, credit conditions, inflation data, and trade policy shifts will be key indicators to watch for confirming these themes.
Final Thought
While many investors chase the latest market fads, Extreme Investor Network readers know that true alpha lies in uncovering hidden value where others fear to tread. Clorox and Steel Dynamics offer compelling narratives backed by strong fundamentals and strategic positioning. As the market cycles through phases of exuberance and caution, these names could reward disciplined investors with both downside protection and upside potential.
Stay ahead of the curve — dive deeper into these sectors, adjust your allocations strategically, and be ready to act as market conditions evolve. The next big opportunity might just be where the crowd isn’t looking.
Source: Clorox has ‘found a bottom,’ Morgan Stanley’s Aaron Dunn says