Regarded as defensive investments, consumer staples stocks are generally safe bets in choppy markets. But they’re also double-edged swords as they often lag in booming conditions, and this pattern has persisted recently. Over the past six months, the industry has recorded a loss of 4.3%, disappointing since the S&P 500 climbed 5.3%.
Investors should tread carefully as the low switching costs for everyday products mean that not all businesses are created equal. With that said, here are three consumer stocks we’re passing on.
Constellation Brands (STZ)
Market Cap: $29.82 billion
With a presence in more than 100 countries, Constellation Brands (NYSE:STZ) is a globally renowned producer and marketer of beer, wine, and spirits.
Why Does STZ Worry Us?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Sales are projected to tank by 6.8% over the next 12 months as demand evaporates
- Efficiency has decreased over the last year as its operating margin fell by 31.8 percentage points
At $169.00 per share, Constellation Brands trades at 13.1x forward P/E. Dive into our free research report to see why there are better opportunities than STZ.
McCormick (MKC)
Market Cap: $18.64 billion
The classic red Heinz ketchup bottle’s competitor, McCormick (NYSE:MKC) sells food-flavoring products like condiments, spices, and seasoning mixes.
Why Is MKC Not Exciting?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Estimated sales growth of 2.8% for the next 12 months is soft and implies weaker demand
- Free cash flow margin shrank by 4.8 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
McCormick is trading at $69.43 per share, or 22x forward P/E. To fully understand why you should be careful with MKC, check out our full research report (it’s free).
Kraft Heinz (KHC)
Market Cap: $32.26 billion
The result of a 2015 mega-merger between Kraft and Heinz, Kraft Heinz (NASDAQ:KHC) is a packaged foods giant whose products span coffee to cheese to packaged meat.
Why Do We Pass on KHC?
- Falling unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 41.7 percentage points
- ROIC of 1.2% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
Kraft Heinz’s stock price of $27.30 implies a valuation ratio of 10.4x forward P/E. If you’re considering KHC for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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