Broadly speaking, consumer stocks are in poor shape as they’re inextricably linked to the broader economy, which is likely heading for a severe contraction. However, if you do a deeper dive into the sector, you’ll be able to find a few undervalued consumer stocks to pick from.
For example, if you follow a basic relative valuation approach, you’d be able to find a number of consumer discretionary stocks that are still trading below their intrinsic value. Alternatively, a statistical market segmentation approach identifies numerous consumer staple stocks that are underpriced and set to perform cohesively with a risk-off market.
As such, it’s not all doom and gloom out there; here are three undervalued consumer stocks to consider.
|HD||The Home Depot, Inc.||$299.83|
|KO||The Coca-Cola Company||$62.53|
Undervalued Consumer Stocks: Home Depot (HD)
Home Depot’s (NYSE:HD) dramatic 27% year-to-date drop is an overreaction by investors, which stemmed from investors fearing rising input costs. However, at a Beta coefficient of 1.0, it’s trivial that this stock has crashed beyond what’s statistically acceptable. Moreover, with rising interest rates, much of Home Depot’s wage cost issues could be resolved amid an easing in the labor market.
HD stock is undervalued on a normalized basis, with its price-earnings ratio at a 20.1% discount. Additionally, the firm’s 33.6% gross profit margin implies that it has plenty of pricing power over its competitors. As such, it could dodge most of the current economic headwinds.
Second-quarter sales data convey that soda and energy drink sales are holding up well and outperforming alcohol sales. For example, as per sample, Coca-Cola’s (NYSE:KO) sales have risen by approximately 9.4% year-over-year, showing no signs of slowing down. The company’s first-quarter earnings report revealed exemplary organic growth with a 22% increase in Europe, the Middle East and Africa sales and an astounding 39% increase in Latin American sales.
Furthermore, Morgan Stanley analyst Dara Mohsenian recently opined that Coca-Cola could sustain its earnings momentum into late 2022 and 2023. According to Dara Mohsenian: “Coke still has room for relative multiple expansion, with Coke’s 2023 P/E multiple essentially in-line with mega-cap CPG peers PG/CL/PEP vs. a 6% premium in the beginning of 2020 pre-COVID.”
KO stock provides a dividend yield of 2.7%. I see this as a critical feature because I believe investors will be chasing dividends for the remainder of the year as a means of fighting capital gains uncertainty.
Undervalued Consumer Stocks: Nike (NKE)
Nike (NYSE:NKE) stock’s advantage is its high-quality attributes stemming from its market position. For instance, Nike’s 27.4% athletic footwear market share allows it to achieve sustainable sales throughout the economic cycle. Investors tend to skew their investors towards high-quality stocks during market adversity due to risk aversion.
Many of Nike’s investors are worried about a slowdown in Chinese manufacturing due to regional pandemic lockdowns. However, despite its supply-line challenges, Nike still managed to beat its fourth-quarter earnings estimate by 9 cents per share. Additionally, Nike completed $1.1 billion worth of share repurchases during the quarter, revealing its commitment to maximizing shareholder value.
On the date of publication, Steve Booyens held indirect long positions in HD, KO and NKE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.