Consumer staples stocks have trailed the market this year, up just 0.2% compared with a roughly 15% advance for the benchmark S&P 500 index. This is somewhat surprising given the essential nature of these companies’ products, which include food, personal care items, cleaning supplies and healthcare products. Yet, on the bright side, this underperformance is offering a chance for investors to purchase undervalued consumer stocks.
In a recession, consumer staples tend to outperform as people continue buying essential items while foregoing more discretionary purchases. Yet, investors have been more attracted to riskier asset classes such as technology stocks this year. The consensus view appears to be that any recession we enter is likely to be shallow and short-lived.
This environment has pushed many consumer staples stocks down to undervalued levels, presenting an opportunity for investors to take a position at attractive entry points. Here are three undervalued consumer stocks to buy now.
Kellogg Company (K)
Shares of the Kellogg Company (NYSE:K) have been trading sideways for some time now. In fact, the stock is down 1.7% over the past five years and up just over 3% over the past decade.
One would assume the company behind popular cereal brands such as Corn Flakes and Frosted Flakes, as well as Pringles chips and Cheez-It crackers, would be performing better. But, alas, the best word to describe the performance of K stock is “stagnant.”
If not undervalued, shares are at least fairly valued at a price-earnings (P/E) ratio of 27.4. K stock also pays a generous 50-cent quarterly dividend for a 3.6% yield. So, what gives?
A lack of growth in its legacy cereal business amid shifting consumer trends and growing competition has held the stock back over the past 10 years. More immediately, investors appear to be waiting for Kellogg to separate its cereal business from its other consumer products, mostly faster-growing snack items. The higher-growth Kellogg operations will be placed in a new company called “Kellanova,” while the North American cereal business will be renamed “WK Kellogg Co.”
Investors might want to get into K stock now before the split happens and take advantage of any bump that occurs, especially with the growth-focused Kellanova business.
Colgate-Palmolive (CL)
Colgate-Palmolive (NYSE:CL) is another consumer stock that could be performing better. The company behind Colgate toothpaste Speed Stick deodorant, Irish Spring soap and Hill’s pet food has seen its share price decline 1.3% this year. Over the past five years, CL stock has risen a marginal 20%.
As with Kellogg, Colgate-Palmolive’s stock looks to be fairly valued. And the company rewards shareholders with a 48-cent quarterly dividend for a 2.5% yield.
Colgate-Palmolive’s first-quarter results were strong. Revenue rose 8.5% year over year to $4.8 billion, which beat the consensus estimate. Earnings per share (EPS) of 73 cents were also better than expected, as analysts were calling for 70 cents. Management raised its full-year outlook, saying it now expects sales growth of 4% to 6%, compared with 3% to 5% previously.
CL is among the best consumer stocks to buy with an economic recession looming. The essential nature of its products makes Colgate-Palmolive a largely recession-proof investment.
Unilever (UL)
British consumer products company Unilever (NYSE:UL) might be less familiar to American investors than today’s other top undervalued consumer stocks. However, its products are certainly household names. Unilever’s brands include Ben & Jerry’s ice cream, Hellmann’s mayonnaise and Dove soap.
Like the other names on this list, UL stock has been a chronic underperformer. This year, the company’s share price is up just 3%. Over the past five years, the stock has declined nearly 6%.
UL stock looks downright cheap with a P/E ratio of less than 16. It, too, pays a handsome quarterly dividend of 44.5 cents for a current yield of 3.5%.
The stock has been weighed down over the years by poor sales and rising competition in the food space. A failed attempt to buy the consumer health division of GlaxoSmithKline (NYSE:GSK) last year didn’t help either. More immediately, UL stock was dinged by news that the company’s chief financial officer, Graeme Pitkethly, plans to leave the company in May 2024.
Still, Unilever is trying to get its house in order and Chief Executive Officer (CEO) Alan Jope seems determined to turn things around. For instance, the company sold its declining tea business, ekaterra, and has bought a company called Liquid IV that makes electrolyte drinks.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
