Two years ago, I recommended a group of seven consumer stocks I thought investors should be buying. As it turns out, I may be on to something.
Between April 26, 2018 and June 23, 2020, my seven picks averaged a cumulative return (excluding dividends) of 73.3%, more than four times the performance of the S&P 500 over the same period. If you take out the best return, from Lululemon (NASDAQ:LULU) which was up 203.7, and the worst return, from Keurig Dr. Pepper (NYSE:KDP) which was up 10.7%, you get an average of 42.7%. That is still more than double the index.
Now, there’s no denying it feels good to see those kinds of long-term returns, but the test of any investor’s mettle is whether they can repeat those gains on more than one occasion.
In other words, did I get lucky? Or do I have a knack for finding stocks that stand the test of time? I like to think it’s the latter. That is why I want to try again.
Rather than pick 10 consumer stocks I think will do well over the next two years, I’ll divide my selections in half, picking five consumer staples stocks and five consumer discretionary stocks. To help with the process, I’ll choose stocks from the top 25 holdings of the largest ETFs by total net assets.
For consumer staples, that would be the Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP). For consumer discretionary stocks, the top ETF is the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY).
With that in mind, here are the top 10 consumer stocks to buy now. My consumer staples recommendations lead the list.
- Procter & Gamble (NYSE:PG)
- Walmart (NYSE:WMT)
- General Mills (NYSE:GIS)
- Monster Beverage (NASDAQ:MNST)
- McCormick (NYSE:MKC)
- Amazon (NASDAQ:AMZN)
- Nike (NYSE:NKE)
- Target (NYSE:TGT)
- O’Reilly Automotive (NASDAQ:ORLY)
- Best Buy (NYSE:BBY)
Consumer Stocks to Buy: Procter & Gamble (PG)
You’re not going to get rich off investing in Procter & Gamble, but you ought to do just fine over the long haul. PG stock is up 15.8% year to date, including dividends through Oct. 22. In fact, as a manufacturer of 21 brands that generate $1 billion in annual sales, the company continues to be a part daily life.
That’s got to count for something. And though PG stock isn’t cheap at more than 5 times sales — you can buy Clorox (NYSE:CLX) for four times sales and it’s been on a tear in 2020 — its brands have household penetration rates that are higher than most of its competitors. Plus, it’s a marketing machine.
InvestorPlace contributor Dana Blankenhorn recently discussed how P&G’s quarterly sales and earnings grew 9% and 19% over the same period a year earlier, and yet the stock barely moved.
“Procter & Gamble stock isn’t for everyone,” Blankenhorn wrote on Oct. 22. “If you’re looking for fat gains, look elsewhere. But if you’re looking for steady income and have a long-term view, it deserves a place in your portfolio.”
It absolutely does.
In the 1960s, the Los Angeles Rams had a defensive line nicknamed the “Fearsome Foursome” with Rosey Grier, Lamar Lundy, Merlin Olsen and Deacon Jones giving opposing offenses fits. I’m too young to have watched them, but I’ve heard plenty in the days since they retired.
My colleague has good taste. He is especially high on Walmart’s chances during the upcoming holiday season.
“Walmart stock is certainly the top stock among the retail stocks for the holiday season. Recently, Jefferies issued a buy rating on WMT stock with a bullish cash price target of $180,” Humayun wrote on Oct. 20.
Even if consumers opt to stay home from the malls in November and December, Walmart has significantly improved its e-commerce business in the last couple of years.
That’s why I recommended WMT stock in August, suggesting that buying under $120 was a great deal. Up almost 10% since Aug. 19, I see the holidays kicking its stock into gear early in 2021.
Consumer Stocks to Buy: General Mills (GIS)
The maker of cereal brands such as Cheerios and Lucky Charms beat analyst estimates in both its fourth-quarter report at the beginning of July and its Q1 2021 report in late September. Yet, on both occasions, GIS stock fell on the news.
It’s not as if General Mills’ stock is doing terribly in 2020 — it has a YTD total return of 15%, double the entire U.S. market — but you would think a company that’s generating $3.2 billion in trailing 12-month free cash flow on $18 billion in revenue would have an enterprise value more than 15 times free cash flow, the inverse of which is an FCF yield of 6.4%.
At the very least, it’s growth at a reasonable price.
However, analysts don’t see it that way. Of the 20 analysts covering its stock, only six have it as a buy or overweight. The rest have it as hold, underweight, or sell, with an average target price of $64.58, only three bucks higher than where it’s currently trading.
In early October, I included GIS stock in a group of seven food stocks to buy. My rationale had everything to do with General Mills making further acquisitions in the pet segment. Eventually, its pet business will make a much bigger contribution to the company’s top and bottom line.
Don’t listen to the analysts. With a yield above 3%, you’re getting income and growth.
Monster Beverage (MNST)
The energy drink maker is having an excellent year in the markets. It’s up 27% YTD and 44% over the past 52 weeks. However, when you look at its three-year and five-year returns — 12.6% and 11.2% on an annualized basis — it’s hard to know if Monster is a growth stock or a defensive stock.
If you consider that its price-sales ratio of 9.9 times is only slightly higher than its five-year average of 9.4 times, it’s hard to say it’s expensive relative to its historical record. However, compared to Coca-Cola’s (NYSE:KO) P/S ratio of 6.5 times, it’s very expensive.
On Oct. 20, Guggenheim Partners analyst Laurent Grandet raised his target price to $90 (11% upside).
“We are adjusting our model ahead of results, where we expect a meaningful sequential organic sales improvement to +11% as consumer mobility has increased, driving growth in the convenience channel,” Grandet wrote. “Although we continue to expect short-term headwinds from Covid-19 and we see increased competitive pressures heading into next year, we still think there is a high likelihood that Coca-Cola will increase its ownership of Monster over time.”
And that’s the attraction of Monster.
Until Coca-Cola bites the bullet and buys the entire business, at a large premium, Monster will continue to go about its business, delivering good sales and earnings growth.
Consumer Stocks to Buy: McCormick (MKC)
McCormick joined the stock split revolution on Sept. 29 when it announced a 2-for-1 stock split for shares of record on Nov. 20. If current prices hold, the split will take MKC stock out of triple-digit territory.
Only briefly, I believe.
On the same day, it announced its stock split, it also announced Q3 2020 earnings. On the top line, sales rose 8% while adjusted earnings per share rose by 5%. The company’s consumer segment delivered plenty of growth offset by weakness in its flavor solutions segment.
For all of 2020, its management expects sales to grow by 4%-5%, despite the difficulties presented by Covid-19.
“We are continuing to capitalize on the global and growing consumer interests in healthy, flavorful cooking, heritage brands and digital engagement. These long-term trends have not only remained intact during this crisis, they have accelerated,” the company’s Q3 2020 press release stated. “Our focus on long-term sustainable growth and strengthening our organization is the foundation of our future.”
Over the past 15 years, MKC stock has generated an annualized total return of 13.9% for long-term shareholders. That’s 360 basis points higher than the U.S. markets as a whole.
I expect it to continue outperforming other food-related stocks over the next 15 years.
Suddenly, heading into the busiest time of the year for Amazon, its stock has gone cold.
The company held its annual Prime Day Oct. 13-14 and although it didn’t reveal total sales for the two-day event, it did say that third-party sellers had $3.5 billion in sales, 60% higher than a year earlier.
Analysts believe that total sales for Prime Day grew by 49% over last year to $10.6 billion. Normally, the event occurs in July, so it will be interesting to see what impact holding the event so close to the traditional holiday shopping season will have on those sales.
Although I have mixed feelings about the company — the most recent example was a CBC Marketplace undercover report that showed just how much of the company’s returns go into a landfill rather than liquidated — it just has too much going for it not to recommend investors own its stock.
Despite my misgivings, I believe AMZN stock could hit $10,000 by January 2023. While its recent cold streak won’t help, I’m sure the holidays will perk up its share price in 2021.
As consumer growth stocks go, I would be irresponsible not to include Amazon on my list. Conscience aside.
Consumer Stocks to Buy: Nike (NKE)
The craziest part of the news story that discussed Nike founder Phil Knight donating $990 million in company stock to a charitable organization in late September was the realization that the former University of Oregon track star was 80 years old.
If you get the chance, I recommend you read Shoe Dog, Knight’s memoir. It’s easily the best business book I’ve read in years. But I digress.
Nike announced strong earnings on Sept. 23 that included beating the Q1 2021 sales estimate of $9.11 billion by 16% and earnings by more than 100% at 95 cents a share. NKE stock rose more than 12% on the news.
“We’re getting stronger in the places that matter most. And even in the midst of disruption, we are on the offense,” CEO John Donahoe said in the company’s earnings call.
Nike expects its 2021 sales to grow between 8%-12%. It took a little detour in the fourth quarter of 2020, losing $790 million, but the 82% growth rate for digital sales in Q1 2021 shows that whatever the problem was, it’s since been fixed.
As long as Phil Knight’s involved with Nike, it’s an excellent stock to own.
Target’s stock has been on fire the past three months, up more than 30%. For those who bought its stock in early April when it was trading below $100, I commend you.
Target held its own two-day sale on Oct. 13-14. It managed to deliver sales that were 2.5 times the revenues from its Deal Days event in July 2019. CEO Brian Cornell was more than happy with this year’s results.
“As we kicked off the holiday season with Target Deal Days, guests shopped deals on thousands of items, making this our biggest and most successful Target Deal Days ever,” said Christina Hennington, executive VP and chief merchandising officer. “In addition to guests saving millions of dollars on some of the season’s hottest items, their use of our contactless same-day services nearly quadrupled, allowing them to receive their purchases in as soon as an hour, with no membership fees required.”
Target reports its third-quarter results in November.
Its Q2 2020 results included brick-and-mortar same-store sales growth of 10.9% and digital comps of 195%. Digital accounted for more than half its overall same-store sales growth of 24.3%.
The 24.3% comp was the highest number it’s ever reported.
Target is more than ready to take on Walmart and Amazon this holiday season.
Consumer Stocks to Buy: O’Reilly Automotive (ORLY)
There is no denying that O’Reilly Automotive has a lot of potential here.
Up just 4.3% in 2020 and 14.2% over the past 52 weeks, something tells me the auto parts retailer is about to kick into gear.
Raymond James analyst Matthew McClintock also thinks so. He recently raised his rating to “outperform” from “market perform” and gave it a target price of $550, providing investors with 20% upside over the next 12 months.
“Ultimately, [McClintock] writes that O’Reilly ‘remains and likely will remain the single best supply chain in this industry for the foreseeable future, even despite investments made by competitors.’ And now investors can buy it 20 times his fiscal 2021 earnings per share estimate, an attractive multiple relative to its history of trading around 22 times,” Barron’s contributor Teresa Rivas reported Oct. 19.
With $1.8 billion in free cash flow in the trailing 12 months, double what it was just two years ago, ORLY is growth at a reasonable price.
Best Buy (BBY)
Best Buy has had an impressive year — up 30% in 2020. For some odd reason, Wall Street has not been clamoring for news about the retailer. Fortunately, InvestorPlace Markets Analyst Luke Lango weighed in recently, calling BBY slightly overvalued but a solid retail play.
“My model assumes that Best Buy sustains ~3% revenue growth and steady operating margin expansion to 5%-plus levels by 2025,” Luke wrote in August. “Under those assumptions, I see earnings per share rising towards $8.20 by fiscal 2025. Based on a 15-times forward earnings multiple — which is historically average for this industry — and an 8.5% discount rate, that implies a 2021 price target for BBY stock of just below $100.”
At the time of my colleague’s article, BBY was trading around $110. Now, almost two months later and trading at $114, I doubt his opinion has changed too much.
Based on a trailing 12-month free cash flow of $5 billion, it has an FCF yield of 17.9%. Even based on its fiscal 2020 FCF of $1.8 billion, it has an FCF yield of 6.4%.
The fact that it’s got a top-notch CEO also helps. Those are hard to come by in corporate America.
Best Buy remains a long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.