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 perception became a reality over the past six months as the sector was down 8.3% while the S&P 500 was up 20.1%.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here is one consumer stock poised to generate sustainable market-beating returns and two best left ignored.
Two Consumer Staples Stocks to Sell:
Conagra (CAG)
Market Cap: $8.18 billion
Founded in 1919 as Nebraska Consolidated Mills in Omaha, Nebraska, Conagra Brands today (NYSE: CAG) boasts a diverse portfolio of packaged foods brands that includes everything from whipped cream to jarred pickles to frozen meals.
Why Do We Avoid CAG?
- Shrinking unit sales over the past two years imply it may need to invest in product improvements to get back on track
- Forecasted revenue decline of 2% for the upcoming 12 months implies demand will fall off a cliff
- Underwhelming 5.3% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its decreasing returns suggest its historical profit centers are aging
Conagra is trading at $16.81 per share, or 9.6x forward P/E. Read our free research report to see why you should think twice about including CAG in your portfolio.
Post (POST)
Market Cap: $5.73 billion
Founded in 1895, Post (NYSE: POST) is a packaged food company known for its namesake breakfast cereal and healthier-for-you snacks.
Why Does POST Give Us Pause?
- Falling unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
- 1.9 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Post’s stock price of $104.97 implies a valuation ratio of 13.8x forward P/E. Check out our free in-depth research report to learn more about why POST doesn’t pass our bar.
One Consumer Staples Stock to Watch:
Procter & Gamble (PG)
Market Cap: $340.7 billion
Founded by candle maker William Procter and soap maker James Gamble, Proctor & Gamble (NYSE: PG) is a consumer products behemoth whose product portfolio spans everything from facial tissues to laundry detergent to feminine care to men’s grooming.
Why Is PG on Our Radar?
- Enormous revenue base of $84.93 billion provides significant negotiating leverage in retail partnerships
- Excellent operating margin of 25.6% highlights the efficiency of its business model
- PG is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
At $145.93 per share, Procter & Gamble trades at 20.5x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free for active Edge members.
High-Quality Stocks for All Market Conditions
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