After offering some sanctuary in last year's falling market, the consumer staples sector is losing some of its sheen as investors become more cautious on companies that make daily goods like shampoos and snacks.

The Standard & Poor's consumer staples index - whose members include Procter & Gamble Co. (PG) - is still outperforming the broader S&P 500, but by a far narrower margin than it did last year. Fears of competition from private-label brands, slower growth in emerging markets, fluctuating currencies and concerns that the big brands may have to cut their prices are putting a damper on the consumer staples group.

"They were such a safe haven last year. They are due for a rest this year," said David Klaskin, chief investment officer of Oak Ridge Investments. His firm is staying underweight on larger consumer staples stocks, but still likes smaller companies like Church & Dwight Co. (CHD), which has a limited exposure to overseas market and a strong position for consumer products like pregnancy tests.

Inventors appear be cautious on some of the largest, most defensive stocks.

In a recent note to clients, Sanford Bernstein analyst Ali Dibadj noted that within the consumer staples group, top investors have been increasing their holdings in more cyclical stocks, or those that are most susceptible to economic volatility.

He said three companies considered the most cyclical names in his group - cosmetics maker Estee Lauder Cos. (EL), direct seller Avon Products Inc. (AVP) and battery maker Energizer Holdings Inc. (ENR) - were found to have the top-20 holders increasing their share holdings between October and December.

By contrast stocks like Procter & Gamble, Kimberly-Clark Corp. (KMB), Colgate-Palmolive Co. (CL) and Clorox Co. (CLX) that are generally considered the most defensive names tended to have top holders decrease their share counts in the sector, he said.

"This is a reversal from trends seen between June and September, and appears to indicate that investors were beginning to turn their focus toward the more discretionary names that had underperformed the market between October and December," Dibadj said.

The recent Consumer Analyst Group of New York conference, the largest annual meeting for the industry, highlighted many of the pressures facing the consumer makers.

"I think especially after CAGNY, after the issues the companies raised, people are sharpening their pencils when they look at this group," said Crisman Boggan, an analyst at MTB Investment Advisors. "I don't think people are running from the group but they are investigating the names with a lot more scrutiny." Most of MTB's funds are currently underweight on consumer staples.

 
   Cash May Be A Better Option

Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman, says he upgraded staples in the first quarter of 2006 and had the sector "above benchmark" for three years. Rauscher now believes that holding cash may be a more attractive option than investing new money in the staples sector.

"It doesn't mean they start to underperform. But it is very late in this trade," he said. Rauscher noted that the sector is no longer outperforming at the same pace that it previously had been. "If you look at it on a relative change basis it looks like they are losing momentum," he said.

In 2008, the S&P 500 fell 38% while the consumer staples index lost just 18%. So far this year the S&P 500 is down 22% compared with a 17% loss for staples.

Caution has crept in even on necessities like food. Stifel Nicolaus analyst Chris Growe wrote in a note to investors that he is sticking with a neutral bias toward the food industry.

"The defensive characteristics of the group suggest a premium to the market is in order, but as we stand now a full 12 months into the recession we do not believe investors will push valuations up much from the current level," Growe said. "Food stocks tend to underperform the S&P 500 for the first six months into a recovery."

-By Anjali Cordeiro, Dow Jones Newswires; 201-938-2408; anjali.cordeiro@dowjones.com