When recession was in the air a few years ago, stock market strategists spoke about investing in “defensive” stocks, usually including the consumer staples sector in those discussions. And while this smaller group has failed to deliver in Canada thus far, its moment may have come — meaning that you should take another look at this sector for your clients’ portfolios.

That’s because recent market action suggests these stocks have more upside potential than other market sectors. For example, in June, the S&P/TSX consumer staples subindex ranked second-lowest in relative strength among the market’s sectors. But, by the end of October, it ranked third-highest.

A check of the fundamentals for these stocks suggests they are — in the main — relatively cheap.

The charm of investing in consumer staples, in the eyes of strategists, is their place in the world as producers of items of everyday, basic needs — such as food, pharmaceuticals, soap and personal-care items — as well as of products that are always in steady demand, such as beer, tobacco and soft drinks. Thus, companies in this sector are viewed as being less affected by downturns in the economic cycle.

In the U.S. stock market, this sector is big, accounting for 11% of S&P 500 composite index. In Canada, consumer staples are a small piece of the action, with a weighting of less than 3% of the overall market. In fact, only utilities and health care are smaller sectors.

Five stocks dominate Canada’s consumer staples sector, accounting for almost three-quarters of the S&P/TSX’s sector subindex. In descending order of weighting, they are: Shoppers Drug Mart Corp., Saputo Inc., Métro Inc., Loblaw Cos. Ltd. and Loblaw’s controlling shareholder, George Weston Ltd.

Two more companies — Viterra Inc. and Alimentation Couche-Tard Inc. — follow closely in market weighting.

Although small- and mid-capitalization stocks tend to outrun the large-caps at this stage of a stock market’s recovery, that may not be true for consumer staples this time around.

The best bargains appear to be among the big and mid-sized companies. The accompanying table shows data for consumer staples stocks included in the S&P/TSX 60, completion and small-cap indices.

Low price/sales and price/book value ratios are the primary indicators of a “value” stock. Book value stripped of goodwill and intangibles provides another view of value, as does the ratio of price/cash flow.

The sales/assets ratio is a broad measure for comparing corporate efficiency.

The stocks that look cheap reflect varying scenarios:

> Loblaw is recovering from a slide in its supermarket results in 2007-08, which is also reflected in Weston’s results.

> Maple Leaf Foods Inc. is rebuilding its operations following the shutdown of its meat-processing operations because of bacterial contamination.

> Couche-Tard has been expanding vigorously in the U.S., and its stock price reflects inves-tor caution over the intense competition there in the convenience-store business.

Data for some smaller companies are incomplete — some because of corporate transformation. Food distributor Colabor Group Inc., for example, formerly was ConjuChem Biotechnologies Inc.; and GLG Life Tech Corp. is a young company whose product is stevia, a natural sweetener.

Among the large companies, Jean Coutu Group (PJC) Inc.’s foray into the U.S. market — and the resulting accounting changes — distort its sales-growth record. IE