If you’re under 40, you’re building capital and you’re looking for gains. This means you should be under-weighting consumer stocks. Names you know that will not grow may throw off income, but they won’t make your retirement.
Such stocks should be sold, maybe to your dad, who can use the income and won’t mind the lack of gains.
This advice runs contrary to conventional wisdom that tells you to own all the market, to buy index funds and take the bad with the good, because you don’t have time to keep up.
Such advice made sense when trading cost big money, and when index funds were a small part of the market. But when you can get into a stock for $5, or out of it, and when index funds send good stocks down along with the bad, or vice versa, it’s time to think differently.
This is the problem with conventional wisdom. If everyone is doing the same thing, no matter how wise that thing may appear, it stops working. If everyone buys value, value becomes overvalued.
If you’re in the capital building phase of your investing career, then, here are some consumer staples stocks to sell.
Campbell’s Soup (CPB)
As trade opened Jan. 25, shares in Campbell Soup (NYSE:CPB) were selling for less than they were five years ago.
Some will tell you to buy Campbell because it tossed long-time CEO Denise Morrison last year and the company might be sold. But waiting on a rumor isn’t a plan. Even a 30% premium in a takeover won’t get this stock back to where it was in 2017.
At $35.38, Campbell’s 35-cent-per-share dividend yields almost 4%, but it takes earnings to sustain a dividend, and the company has been able to out-earn its payout in only two of the last four quarters. There is no cash to speak of and $8 billion of debt.
Right now Campbell is selling its international business and it just hired a new CEO, Mark Clouse, who worked at both bidders. He also led Pinnacle Foods into its acquisition by ConAgra Brands (NYSE:CAG) last year.
Maybe Clouse can stabilize the ship. Maybe Clouse can even get the company sold. But while you have your capital tied up wishing and hoping, better companies will be growing.
If you are to invest in a consumer stock, buy the best of breed.
Shares in Colgate-Palmolive (NYSE:CL) are trading at about where they were in January of 2014 because the company isn’t best of breed — it’s one of the consumer staples stocks to sell, if anything. Proctor & Gamble (NYSE:PG) is best of breed in this area, and when times are troubled, as they are now, the best companies will outperform the second best.
Colgate needs about $400 million in earnings to sustain its dividend, and it only gets 50% more than that, not enough to raise it, and long-term debt is nearly half its assets, with very little cash on the books, meaning there’s no room to maneuver out of its problems through an acquisition.
CL is a consumer stock for people in their 70s who see a yield of 2.69% as a bargain. There are people pounding the table for Colgate to be bought, but a young investor should be chasing performance, not rumors, or any of the other consumer stocks on this list.
There are analysts who will tell you that stocks like Colgate do well in bear markets. But, again, the market has no prizes for second place. Colgate shares are down 19% in the last year.
If you want to be defensive as a young investor, only buy market leaders. They cost more for a reason. They earn it.
Hormel Foods (HRL)
Hormel Foods (NYSE:HRL) is better known as the “House of Spam.”
People laugh at Spam but it’s good food, pork and ham made shelf-stable with salt. It helped win World War II. It’s still a staple in Hawaii and Alaska.
But the stock trades below where it was a year ago, and the yield is under 2%. The dividend is well-protected by earnings, but there is no growth here. Sales for fiscal 2018, which ended in October, were little changed from 2016. The net change in cash has averaged just $30 million over the last four years.
If your money is heading into retirement, consider Hormel. They will pay you to own them. They are good people. But if you’re looking to grow your nest egg, HRL is one of the stocks to sell and/or avoid.
Kraft Heinz (KHC)
When the geniuses at 3G Capital combined with legendary investor Warren Buffett of Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) to create Kraft Heinz (NYSE:KHC) in 2015, there was excitement and much rejoicing.
But you can’t make a silk purse out of a sow’s ear, even with zero-based budgeting. Consumer staples like processed cheese and ketchup, those dreaded “middle of the supermarket” items, just aren’t growing. Kraft Heinz has been unable to grow sales for the last three years, and so the stock is down about 50% from its 2017 high.
The fall in price has made the dividend more valuable. The yield is now 5.3%, so this might be a good pick-up for an income investor. But cheap stocks are cheap for a reason. The price-to-earnings multiple of Kraft Heinz is under 6x.
Packaged goods companies like Kraft Heinz just aren’t the safe havens they once were. Their share of the western dinner plate is slowly shrinking. Younger consumers want fresh food and older consumers can afford fresh food.
Kraft Heinz needs nearly $3 billion in income, each year, to pay its $2.50 per share dividend. Thanks to 3G management, it gets that, and more. But there is over $28 billion in long-term debt on the books, against less than $1.5 billion in cash. Kraft’s acquisitions are small, marginal and distracting. Kraft growth initiatives like Devour, frozen meals targeted at men, are growing but not fast enough to change the narrative.
Tell your mom to buy Kraft Heinz. She’ll love you for it. But you need to find something bigger for your money.
YUM Brands (YUM)
Unlike the other companies in this collection YUM! Brands (NYSE:YUM) has delivered investors a capital gain over the last year, but it’s under 10%.
In order to deliver that gain, YUM! Management has been doing all it can to create buzz. It gets women to dress up as Colonel Sanders, it constantly tinkers with the Taco Bell menu and it delivers beer for Pizza Hut.
But fast food is fast food. Fast food is not a growth industry. Spinning out the Chinese operations as YUM China (NASDAQ:YUMC) in 2016 was a winner for shareholders, but when you buy stock, you’re buying tomorrow.
YUM! continues to push for growth, but there is very little growth in fast food, and the yield on the stock’s 36-cent-per-share dividend is just 1.6%. YUM management continues to try and control its store ecosystem, recently buying QuikOrder, which sells sales software to fast food restaurants. QuikOrder’s sales won’t move the needle on sales and revenue for Yum, and which fast food operator wants to buy his ordering software from a competitor?
Most analysts can’t offer anything more than a “hold” rating on Yum! Brands shares and I can’t say I disagree with them.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a positon in any of the aforementioned securities.