Consumer staples stocks may not be as glamorous as the red-hot technology stocks that are stealing the limelight nowadays, but that doesn’t mean they’re unworthy of investors’ attention.
Indeed, the staples provide a valuable role as defensive assets in times of economic uncertainty, and for that reason should be considered by participants not only for their safety merits, but for their growth potential as well. Here we’ll look at some consumer staples stocks with reasonably low risk profiles that also present opportunities for investors who want to hedge the higher-risk elements of their portfolios.
Consumer staples are the stocks that growth investors love to hate (partly because of their conservative nature), yet they’ve acted much like growth stocks in recent years. In 2019, the staples performed in line with the benchmark S&P 500 Index for much of the year. The reason for last year’s strong performance in the staples was easy to see: investors were worried about the U.S.-China trade war and used the staples to hedge against potential volatility arising from the tariff dispute.
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It should be pointed out by way of disclaimer, however, that while staples are often regarded as being somewhat immune to broad market selling pressure, that isn’t always the case as owning staples isn’t entirely without risk. The shares of companies that make products which are used by consumers every day (like toothpaste, razors, food and beverages) were just as hard hit by the COVID-related market panic this past March as any other market segment. Nonetheless, those stocks quickly rebounded once the panic subsided and it became clear that households would be using far more staples than discretionary items during the subsequent shutdown.
Over the last few months since the lockdowns began, consumer staples stocks in the aggregate have posted an admirable performance. Many leading stocks in this category have gone on to post new record highs, and most of the leaders in this segment have at least completely recovered their pre-pandemic peaks, as reflected in the Consumer Staples Select Sector SPDR ETF (XLP) shown below.
With uncertainties still abounding over another fiscal stimulus, as well as worries about the continued recovery of the U.S. economy, consumer staples are now back on investors’ radars. Further, the need to diversify and hedge volatility risk is still strong, and as such, I think the following four members of the staples sector are worthy considerations as portfolio candidates for both defensive-minded and growth-oriented investors.
4 Consumer Staples Stocks to Buy
Consumer Staples Stock #1: Walmart (WMT)
There’s no bigger purveyor of consumer staples than Walmart (WMT), and the store has been one of this year’s top-performing food and merchandise retailers. Not surprisingly, the company knocked it out of the ballpark during the second quarter, with U.S. same-store sales (arguably its most important metric) rising 9%, thanks to a whopping 97% increase in e-commerce.
Total revenue in Q2 was $138 billion (up 6%), while adjusted per-share earnings of $1.56 were 23% higher from a year ago. Among the top sellers for Walmart have been COVID-related cleaning and disinfectant products, as well as paper products. Food supplies have also been in high demand as households have largely forsaken dining out in favor of eating in. To that end, more than 2,700 Walmart stores offered free grocery pick-up, while more than 1,100 stores offered same-day grocery delivery, pushing the company’s food sales higher.
Looking ahead, management plans to increase the number of stores offering same-day grocery delivery. Meanwhile, analysts predict a 3% increase in revenue in each of the next two quarters, along with a 2-3% rise in share earnings.
Walmart shares are also showing signs of strength ahead of what should be a profitable Q4, as expectations are high that the store’s sales will once again exceed expectations during the upcoming holiday season. It’s a solid-looking chart featuring strong price momentum, as reflected in the rising 25-day and 50-day lines. (I suggest using the 50-day line as a stop-loss guide if you’re long WMT).
Consumer Staples Stock #2: Procter & Gamble (PG)
When most people think of consumer staples, Procter & Gamble (PG) is one of the first companies that come to mind. The firm’s core earnings climbed 13% in fiscal 2020 (which ended June 30) on a 6% organic sales increase. As with Walmart, Procter & Gamble saw huge demand for its cleaning and hygiene-related products pertaining to COVID-19.
Going forward, analysts believe the favorable economic tailwinds for Procter & Gamble will continue in the months ahead. For fiscal 2021, management guided for earnings to rise 3-7% on a top-line increase of between 2% and 4% (in line with consensus estimates).
More importantly, the company has announced plans to return approximately $15 billion to shareholders in the form of buybacks and dividends in the coming year. With a current annual dividend per-share yield of 3.2%, this is an attractive reason to own PG. And from a technical perspective, PG’s chart (below) commends it to momentum accounts.
Consumer Staples Stock #3: Colgate-Palmolive (CL)
Another leading staples provider, Colgate-Palmolive (CL) has seen a strong year for sales, due in part to the pandemic. The company is the second-biggest maker of toiletries and household products in the U.S., with several recognized brands including Ajax, Fab, Murphy and Colgate.
In the second quarter, Colgate-Palmolive posted solid growth in net sales, organic sales, operating profit, earnings per share, and cash flow despite headwinds from the depressed global economy. Even so, the company saw growth in five of its six divisions with a gross profit margin of 61%. Analysts believe the firm’s top line will increase 2% in 2020 while the bottom line rises a respectable 5% for the year. (Earnings for Q3 are expected on October 30.)
Consumer Staples Stock #4: Ball Corp. (BLL)
Ball Corp. (BLL) is a well-known maker of metal and plastic packaging for the food and beverage industries (you’ve likely seen their iconic wide-mouth glass canning jars emblazoned with the famous Ball logo). But what you may not know is that Ball also provides products for the growing space industry—including spacecraft, components and instruments for national defense, civil space and commercial space applications.
Indeed, aerospace-related sales have been a key driver for Ball this year, with segment revenue rising 16% in the latest quarter. The company’s revenues also benefited in the June quarter from strong aluminum packaging demand, as well as from strong post-COVID recoveries in aerosol and aerospace units (which the firm believes will be growth leaders going forward). Moreover, analysts see Ball’s bottom line rising 10% for both Q3 and full-year 2020, with continued top- and bottom-line growth anticipated in the years to come.
Among the blue-chip staples names, Ball must surely rank as one of this year’s best performers from strictly a share price perspective (as the following graph testifies). In view of the company’s longer-term growth potential, there is good reason for expecting this forward momentum to continue in the months ahead.
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Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More