Consumer products companies are considered one of the safest equity investments in a recession. Even in a bad economy people have to buy soap, razors, and personal care products. So, why is Warren Buffett selling parts of his stakes in Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG)?
According to Bloomberg, "Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A) cut holdings of Johnson & Johnson, the world's largest maker of health-care products, and Procter & Gamble Co. as he turned his attention to fixed-income investments." In theory, fixed income instruments are safer than stocks, but Buffett recently said that some investments should be held "forever."
Perhaps the strangest thing about Buffett's move is that both P&G and J&J are trading near 52-week lows. He is not giving himself the chance to ride the shares up when an economic recovery comes.
Buffett may have a view that is worth considering. It may be a guess, but it could reflect his view of the economy. If the recession deepens, consumers may move toward low-priced and private label brands, even for toothpaste and dish soap. If so, P&G and J&J will be attacked by inexpensive brands and their choices will be to lose sales or drop prices. That could send their shares down even more.
Douglas A. McIntyre is an editor at 24/7 Wall St.