Is it time to think about the fear trade again? That’s the question that many investors are undoubtedly pondering. Although the benchmark indices moved higher on the May 13 session, snapping a three-day losing streak, their technical posture doesn’t look particularly encouraging. Therefore, the idea of rolling over into consumer staples recently gained much traction.
First, the high-flying technology sector is pinging trouble, with the Nasdaq Composite index sandwiched between the 50-day moving average at top and the 200 DMA at bottom. While tech isn’t the end-all, be-all, it has become a vital component of our economy. We’re past the manufacturing phase and well into the information age. If our flagship innovators are suffering, this offers a good reason to consider consumer staples.
Second, it’s not just the Nasdaq that poses concerns for equities buyers. Frankly, the S&P 500 is also printing an ugly chart pattern. While the benchmark index isn’t as technically damaged as the Nasdaq, it has fallen below a critical horizontal support line around 4,140 points. Plus, it’s barely holding above its 50 DMA. Any more negative news could send investors out of growth stocks, which may benefit boring but reliable consumer staples.
Third and most importantly, the consumer staples industry is largely agnostic to market and economic cycles. One of the reasons why the rush for toilet paper last year frustrated so many is that people typically don’t have more bowel movements because the S&P 500 shed basis points. Therefore, demand is much more predictable with this sector than in most other market segments.
Moreover, we just don’t know what to expect moving forward. Maybe growth stocks will recover or maybe not. One thing is certain: you’re going to need to brush your teeth and take care of your other needs. Thus, you should consider these consumer staples stocks amid rising uncertainty.
- Procter & Gamble (NYSE:PG)
- Hershey (NYSE:HSY)
- Pepsico (NASDAQ:PEP)
- Kellogg Company (NYSE:K)
- Altria Group (NYSE:MO)
- Colgate-Palmolive (NYSE:CL)
- Dollar Tree (NASDAQ:DLTR)
Please note that boring doesn’t mean risk free. As with any investment, there is the possibility of total losses. Nevertheless, consumer staples bring a strong measure of stability to your portfolio, which is at a premium right now.
Consumer Staples Stocks: Procter & Gamble (PG)
When it comes to consumer staples, I couldn’t think of a better name than Procter & Gamble. Like virtually every equity unit in this space, you’re not going to get rich with PG stock. Over the trailing five years, shares have returned 72%, which isn’t bad at all considering the circumstances.
Obviously, though, you can easily accrue that in a year with a hot growth stock. And with some cryptocurrencies, you can get that in a day. But from the looks of things, the market may be shying away from risk. As I’ve mentioned in other InvestorPlace articles, stock trading on margin continues to post record high after record high.
Please don’t fall for the “this time it’s different” argument. It’s never different. The names may change but the game stays the same.
What also doesn’t change is the nature of consumer staples. If you look at Procter & Gamble’s long-term revenue, it’s consistent. And in 2020, the company saw a nearly 5% revenue boost to $71 billion. Further, its latest earnings report for the quarter ended March 31, 2021 posted a 5.2% revenue increase to $18.1 billion.
Faced with the unknown, I like my chances with PG stock.
While the investing narrative for consumer staples tends to be rather pedestrian, that doesn’t mean the underlying company has to be a snoozer. Case in point is Hershey, one of the world’s most iconic confectionary brands. During this awful time, who wouldn’t want to indulge in such delectable pleasures?
Indeed, according to a report from the International Journal of Health Sciences, “Cocoa polyphenols have been shown to reduce stress in highly stressed, as well as normal healthy individuals.” Further, researchers discovered that commercially available chocolate reduced stress in female medical students. It’s a fascinating study and one I suppose you could use to justify your indulgences.
Sure enough, HSY stock has responded very well to investor sentiment. On a year-to-date basis, Hershey shares are up 14%, making it one of the better-performing consumer staples stocks. Over the trailing month, HSY gained momentum, returning 8.5%.
Further, some experts predict that the global chocolate market will increase at a compound annual growth rate (CAGR) of over 4% between 2021 through 2026, reaching about $172 billion by the end of the period.
Positive revenue growth for 2020 and for its first quarter of 2021 earnings report suggests that HSY stock can keep on moving higher.
Consumer Staples Stocks: Pepsico (PEP)
The other major American soft drink manufacturer, Pepsico often clashes head-to-head with Coca-Cola (NYSE:KO). If you’re interested in consumer staples — and who isn’t these days? — I don’t think you can go wrong with putting both PEP stock and KO in your portfolio. But since I’ve talked so much about Coke in the past, I’m going to share the love with Pepsi.
Regardless of the two companies’ rivalry, they’re united in their primary investment thesis: they provide a cheap respite or thrill. That’s especially true now. Yes, you can make the argument that the economy is on the recovery trek. But the employment level still shows that it’s down nearly 5% from pre-pandemic levels. Nominally, we’re talking about a loss of 7.6 million people.
So I’m not necessarily buying the argument that everything is going to be hunky-dory. Instead, I see some consumer pain, which may end up benefitting PEP stock.
How so? If you look at Starbuck’s (NASDAQ:SBUX) 2020 revenue, it was down more than 11% from last year. In Pepsico’s case, revenue increased almost 5%, suggesting that cheaper caffeinated Pepsi products may be stealing market share from those offering premium caffeine products. It’s worth keeping PEP on your radar, especially as we march into uncharted territory.
Kellogg Company (K)
Technically, you can save money by skipping breakfast, which wouldn’t be helpful for Kellogg Company’s bullish argument. However, breakfast is also the most important meal of the day and that’s not just an aphorism. Rather, it’s backed by science.
According to the BBC, in one U.S. study “that analysed the health data of 50,000 people over seven years, researchers found that those who made breakfast the largest meal of the day were more likely to have a lower body mass index (BMI) than those who ate a large lunch or dinner.”
Considering that millions of Americans put on the pounds, it’s not inconceivable that this country collectively may rethink breakfast, which could bolster K stock. From a Healthline.com report, 61% of U.S. adults reported undesired weight changes since the pandemic began. And I don’t think it’s presumptuous to say that undesired weight changes translate to an increase, not a decrease.
Now, even if the above hypothesis doesn’t pan out, it’s clear that Kellogg is winning over consumers whatever the reason. In its Q1 report, the company posted revenue of $3.58 billion, up 3.5% sequentially from Q4. Therefore, it makes sense to add K stock to your consumer staples portfolio.
Consumer Staples Stocks: Altria Group (MO)
Although consumer staples often have a benign reputation about them, you can’t make a sweeping generalization about this sector. A great example of this is Altria Group, a big tobacco firm. As such, it’s never too far away from controversy. Still, investors bought into MO stock because of its profitable cynicism. Basically, people are hooked on its products.
To be fair, that narrative came under fire because of the e-cigarette or vaping phenomenon. According to data from the Centers for Disease Control and Prevention, “Current smoking has declined from 20.9% (nearly 21 of every 100 adults) in 2005 to 14.0% (14 of every 100 adults) in 2019, and the proportion of ever smokers who have quit has increased.”
Also, teen smoking is on the decline, which public health officials celebrated. However, vaping took over the reins, which led to serious debates about how to address the matter. Later, in a pandemic relief package, lawmakers put in a provision that banned the U.S. Postal Service from shipping vape products to adults.
How the provision stops teen vaping is unclear, but it definitely imposed a dark cloud on small business owners. Nevertheless, this could benefit MO stock as more adults may invariably pick up the “analog” smoking habit.
Depending on how the pandemic and the economy play out, Colgate-Palmolive may turn out to be one of the top performing consumer staples stocks. For one thing, the company offers an indelible core business. Obviously, no one is going to stop brushing their teeth because of a pandemic or a recession. At least I hope not.
Because of this dynamic, you can depend on CL stock. In recent years, its annual revenue has been very consistent, again emblematic of consumer staples. But in 2020, Colgate-Palmolive enjoyed a 5% year-over-year revenue lift to $16.5 billion. This performance is exceptional considering its lack of revenue growth variance in other years.
Are people brushing their teeth more? In a way, yes. According to a report from JDR Clinical & Translational Research, nearly “half of respondents (46.7%) reported delaying going to the dentist or receiving dental care” due to the pandemic.
You’d expect that sentiment to die down as novel coronavirus cases faded. But in Colgate’s Q1 2021 earnings report, it posted 6% YOY revenue growth. This suggests that consumers are taking their dental health in their own hands. That’s not great for our collective health but it’s wonderful for CL stock.
Consumer Staples Stocks: Dollar Tree (DLTR)
Fundamentally, Dollar Tree makes a lot of sense if you’re interested in the consumer staples space. While certain economic metrics are encouraging, not all signs point toward a positive trajectory. As I mentioned earlier, the employment level is down nearly 5% from right before the pandemic.
Also, the labor force participation rate at 61.7% in April 2021 hasn’t been this low since 1977. That’s worrisome because participate rates improve extremely slowly. In prior generations, this metric swung higher based on seismic paradigm shifts, such as women entering the workforce at scale. Today, we don’t have such paradigm shifts, unless they’re catalysts to the downside.
Therefore, it’s difficult for me to have full faith in the V-shaped economic recovery narrative. While I can’t say for certain, it seems more probable that we’ll have a L-shaped recovery: a slow, protracted return to normal. If that’s the case, I’d feel more comfortable with my money on DLTR stock.
Admittedly, what’s distracting is that Dollar Tree shares have a tendency of trading wildly, even before the pandemic. Still, if you can overlook the chop, the financials weave a more decisive narrative. In the year ended January 2021, Dollar Tree rang up revenue of $25.5 billion, up 8% from the prior year.
Also, its most recent quarter shows revenue growth of 7% to $6.8 billion. DLTR stock isn’t the most exciting name but it could become very relevant soon.
On the date of publication, Josh Enomoto held a LONG position in MO. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.