Regarded as defensive investments, consumer staples stocks are generally safe bets in choppy markets. The flip side is that they frequently fall behind growth industries when times are good, and this was the reality over the past six months as the sector’s flat performance trailed the S&P 500’s 16.2% gain.
Given the low switching costs of basic goods like paper towels, many companies will continue generating poor results while only a handful will shine. Keeping that in mind, here are three consumer stocks we’re passing on.
Brown-Forman (BF.B)
Market Cap: $12.1 billion
Best known for its Jack Daniel’s whiskey, Brown-Forman (NYSE:BF.B) is an alcoholic beverage company with a broad portfolio of brands in wines and spirits.
Why Are We Hesitant About BF.B?
- Annual sales declines of 2.4% for the past three years show its products struggled to connect with the market
- Projected sales for the next 12 months are flat and suggest demand will be subdued
- Earnings per share have dipped by 2.1% annually over the past three years, which is concerning because stock prices follow EPS over the long term
Brown-Forman is trading at $26.19 per share, or 15.4x forward P/E. To fully understand why you should be careful with BF.B, check out our full research report (it’s free).
Flowers Foods (FLO)
Market Cap: $1.26 billion
With Wonder Bread as its premier brand, Flowers Foods (NYSE:FLO) is a packaged foods company that focuses on bakery products such as breads, buns, and cakes.
Why Do We Think FLO Will Underperform?
- Shrinking unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
- Projected sales decline of 3.1% for the next 12 months points to a tough demand environment ahead
- Earnings per share fell by 24.3% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable
Flowers Foods’s stock price of $5.95 implies a valuation ratio of 8.5x forward P/E. If you’re considering FLO for your portfolio, see our FREE research report to learn more.
PepsiCo (PEP)
Market Cap: $176.9 billion
With a history that goes back more than a century, PepsiCo (NASDAQ:PEP) is a household name in food and beverages today and best known for its flagship soda.
Why Do We Think Twice About PEP?
- Falling unit sales over the past two years suggest it might have to lower prices to stimulate growth
- Projected sales growth of 3.3% for the next 12 months suggests sluggish demand
- Earnings per share lagged its peers over the last three years as they only grew by 5% annually
At $129.78 per share, PepsiCo trades at 14.9x forward P/E. Dive into our free research report to see why there are better opportunities than PEP.
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