The first quarter of 2018 has been solid regarding profits. They grew by almost 26% — the best Q1 return in eight years. Unfortunately, investors aren’t buying any of the good news, and that’s especially true of consumer stocks, which are getting hammered year to date.
It’s especially true of the consumer staples sector, which saw earnings per share rise by a projected 13%, yet consumer staples stocks are down 13% through May 11.
“In 1Q, the market’s response to earnings releases of Consumer Staples companies has been the worst of any sector,” Jonathan Golub, chief U.S. equity strategist at Credit Suisse, wrote in a note to clients. “This weakness is largely the result of margin pressures across all Staples sub-sectors, stemming from lack of pricing power and rising input and commodity costs.”
In fact, if you exclude the gains from the corporate tax rate cut, consumer staples stocks only delivered 2% growth in Q1 EPS.
Although profits are expected to remain healthy in 2018 as a result of the tax cut, you might want to consider selling these seven consumer stocks now.
Consumer Stocks to Sell Now: Anheuser Busch InBev (BUD)
While Anheuser Busch InBev NV (ADR) (NYSE:BUD) generated solid growth outside the U.S. in Q1, domestic results weren’t nearly as healthy.
Budweiser, the company’s leading beer brand, saw revenues decline by 1.3% on a global basis with the U.S. dragging down its results with a 3.8% decline, an indication that craft beers continue to take market share. The company estimates it lost 0.5% market share in the U.S. in the quarter.
Regarding volume, Anheuser Busch’s North American business experienced a decline of 1.1 million hectoliters (4.1%) in the quarter, suggesting the company has a big problem on what was once its home turf.
BUD made $0.73 in normalized earnings per share in the quarter, a penny less than a year earlier. With long-term debt of $109 billion or 67% of its market cap and annual interest payments of approximately $4 billion, Anheuser Busch can’t afford to have the U.S. sputtering.
It’s not the worst of the 7 consumer stocks in this article, but it does have to tread carefully if it wants to see any capital appreciation over the next 12 months.
Consumer Stocks to Sell Now: Pool Corp (POOL)
It’s not surprising that Pool Corporation (NASDAQ:POOL) has been on a big run the past five years, up 24% on an annualized basis. After all, as housing prices move higher, the swimming pool becomes an important selling feature for those looking to trade up.
POOL is one of those stocks I wish I’d owned long-term because it’s been one of the most consistent performers on NASDAQ. If you look at its annual returns, you’d swear you were looking at a fast-growing tech stock, not the world’s leading distributor of swimming pool products.
So, why is it on my list of consumer stocks to sell now?
It has a very high valuation trading at 38 times cash flow, the company’s second-highest multiple in the past decade. Regarding free cash flow, Pool has an FCF yield of 2.1%; value investors generally consider 8% the bare minimum.
Growing its top line by 5% a quarter, it’s hard to argue with its success. However, something tells me reversion to the mean is about to set in.
Consumer Stocks to Sell Now: Nike (NKE)
Nike Inc (NYSE:NKE) is one of my all-time favorite companies. I’ve liked it ever since visiting its Portland campus in the mid-1990s. It was so cool to see people working out, playing basketball in the company gym, and generally living the Nike credo Just Do It.
Last year, I read Phil Knight’s book, Shoe Dog, and the halo surrounding its business only got bigger. However, like all legendary figures that get too big for their britches, Nike’s fallen hard after word got out that it’s a breeding ground for sexist individuals.
Forget the fact that Nike’s competitors have gotten much stronger in recent years forcing it to push back its goal of hitting $50 billion in annual revenue by two years to 2022.
That’s business.
What’s happened at Nike regarding the marginalization of female employees is a situation that’s much bigger than the business itself. CEO Mark Parker has a serious problem on his hands that can’t be solved by merely pushing out the biggest offenders.
“The executive departures could be more disruptive than most appreciate,” wrote Susquehanna’s Sam Poser on April 19. “While we believe there is talent that can step into the vacated roles, the contributions of the departing executives will not easily, nor quickly, be replaced.”
This misconduct is going to hurt the company for a long time to come.
Consumer Stocks to Sell Now: Lamb Weston (LW)
Lamb Weston Holdings Inc (NYSE:LW) was spun off by Conagra Brands (NYSE:CAG) in November 2016. Conagra shareholders got one share of Lamb Weston for every three shares held in the parent.
Conagra shareholders who kept both their stocks are sitting on a 69% return over 17 months. With its retail segment experiencing healthy growth in the top- and bottom-line in the latest quarter (Q3 2018), it’s hard to see Lamb Weston having a weakness that would result in a lower share price over the next 6-12 months.
However, it’s my experience that companies spun off by their parent generate big returns in the 12-18 months after they’ve become independent businesses. After that, the honeymoon wears off, and it’s back to business.
The company expects sales in fiscal 2018 in the 5%-7% range with adjusted EBITDA of $810 million. Trading at 3x sales or double the industry average, any misstep by Lamb Weston over the next couple of quarters is going to hit LW stock hard.
Do I think that’s likely? No, but it’s definitely priced for perfection.
Consumer Stocks to Sell Now: Kraft Heinz (KHC)
Although I’m a fan of Warren Buffett, I’m not nearly as enthusiastic about his 3G Capital partners, whose slash and burn style of management has brought Canada’s iconic Tim Hortons coffee shops to the brink.
Here in the U.S., 3G’s move to grow Kraft Heinz Co (NASDAQ:KHC) is moving along at a snail’s pace. It reported Q1 2018 earnings May 2 that were anything but extraordinary with revenues down 0.3% to $6.3 billion while operating profits grew by just 3.4% to $1.5 billion.
Revenues in the U.S. declined by 3.3% in the quarter to $4.4 billion with a 5.6% decline in its segment adjusted EBITDA to $1.4 billion. Considering the U.S. accounts for 69% of the Kraft Heinz’s overall sales, that’s not a promising way to start out fiscal 2018.
One thing I’ve learned about 3G Capital businesses: they have lots of debt. Kraft Heinz ended the first quarter with $28.6 billion in debt or 40% of its market cap. That’s not quite as high as Anheuser Busch, another of 3G’s investments, but high nonetheless.
Unilever NV (ADR) ADR (NYSE:UN) was smart to turn down the company’s $143 billion bid in early 2017.
Consumer Stocks to Sell Now: Ralph Lauren (RL)
Now that Ralph Lauren Corp (NYSE:RL) plans to add Angela Ahrendts to its board, I’m probably barking up the wrong tree.
However, as good a retailer as she might be, she’s a board member, not the CEO. That job falls to Patrice Louvet who was hired a year ago to fix what ails the once iconic apparel company. Louvet, who ran the global beauty business at Procter & Gamble Co (NYSE:PG), was hired after former CEO Stefan Larsson left over a disagreement with Lauren over the direction of the company.
Louvet, who has no apparel experience, is still feeling his way as he turns around the company.
In early February, Ralph Lauren announced its third-quarter earnings, which saw North American same-store sales fall 10% in the holiday quarter, three percentage points worse than analyst expectations.
If not for strong sales in China, the quarter would have been a complete disaster. On May 23, it reports fourth-quarter earnings. Investors can expect more sales declines as Louvet works to find a bottom.
I don’t see it delivering much in the way of good news, but we’ll see.
Consumer Stocks to Sell Now: Deckers (DECK)
Well, if there’s a storm brewing with Deckers Outdoor Corp (NYSE:DECK), you wouldn’t know it by its share price because it’s trading at or near at 52-week and a 5-year highs of $99.46.
In mid-April, Barron’s highlighted the reasons why DECK stock may have run its course.
“Deckers benefited from strong demand for its UGG brand of footwear, helped by harsh winter conditions, and it’s also been bolstering its omnichannel capabilities,” wrote Teresa Rivas April 18. “The company is also buying back stock with its ‘significant” cash position, which offers some support for the shares.”
According to Tigress Financial analyst Ivan Feinseth, who downgraded DECK in April from a buy to neutral, suggesting revenues might only grow by 1% in fiscal 2018.
If you’ve followed Deckers for any period of time you already know what a volatile stock it is. To make matters worse, Deckers just appointed to its board of directors Bill McComb, the former CEO of Liz Claiborne, who almost singlehandedly drove that company into the ground.
Deckers is ready for a big fall.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
