Now that the dust has settled from the recent equity market sell-off, some attractive turnaround stocks have emerged across a number of sectors. In fact, there are so many stocks for value-oriented investors to find opportunity in that it has become something of a challenge to sort through them all.
To streamline the evaluation and discovery process, here at the Cabot Turnaround Letter I’ve chosen to pursue what I consider to be two of the market’s most clear and dominant themes by looking at areas of the market that are likely to benefit from them. They are:
1.) Sectors that look to strengthen in a falling bond rate environment (of which we’re clearly in the early stages); and
2.) Stocks that should also serve as “safe havens” from the global military, economic and political uncertainty that’s sure to increase in the next few months.
As it turns out, turnaround opportunities abound in both categories as investors continue to worry about an escalation of the wars in Eastern Europe and the Middle East, as well as about the upcoming U.S. presidential election. But one sector in particular appears to be benefiting from each of the above-mentioned catalysts (election uncertainty in particular), namely consumer staples.
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While geopolitical fears and worries over economic factors like inflation persist, they’ve been fairly constant this year. But as November draws near and the race between candidates Donald Trump and Kamala Harris tightens up, apprehension is likely to increase over the outcome of what many view as a momentous presidential election.
As the zero hour draws near, there has naturally been a visible increase in the number of hedges investors have made, with traditional safe havens like gold, utilities and consumer staple stocks attracting a lot of buying interest lately. Consumer staple stocks in particular have seen a surge in demand, as the sector combines the benefits of a defensive nature with steady cash flows and often hefty dividend payouts.
A couple of weeks ago, I spotlighted the consumer staples sector tracker, the Consumer Staples Select Sector SPDR ETF (XLP) as being a likely prime beneficiary of the rise in defensiveness among investors, and the ETF has strengthened since then. Now we’ll dig a bit deeper in our search to uncover two well-known consumer staples stocks primed for a turnaround in an increasingly defensive environment.
2 Well-Known Turnaround Stocks for a Defensive Environment
Potential Turnaround #1: Hershey (HSY)
America’s love affair with chocolate is so well established that demand for Hershey’s (HSY) products is entrenched even in economic downturns or times of uncertainty. That’s just one reason why the company is positioned to outperform in the coming months. Soaring sugar and cocoa prices over the last couple of years put pressure on Hershey’s margins, but with the prices for both commodities cooling off, value-oriented institutional investors are taking a closer look at the stock. Moreover, the recent Kellanova-Mars mega-merger in the sector has many analysts looking at Hershey as a player in the M&A hunt for companies with exposure to the salty snacks business. (On that score, Hershey recently announced plans to “aggressively scale” its salty snack business). A steady dividend over the last century (currently at a healthy 2.8% yield) serves as an added enticement, and management expressed its belief in the turnaround potential by raising the dividend by 15% at the end of Q1.
Potential Turnaround #2: General Mills (GIS)
For food producers like Hershey, the ability to capitalize on falling input costs is a paramount concern in the drive to improve gross margins. Another company falling under this category is consumer foods giant General Mills (GIS), which needs no introduction. The company should also benefit from lower input costs going forward, and its dividend is regarded by analysts as being both recession- and inflation-proof, with 124 years of uninterrupted payouts. Moreover, a recent tracking poll by Nielson found that General Mills was among a handful of standout brands that saw its retail food sales over a four-week period ended August 10 improve sequentially during the tracking period. Wall Street sees revenue steadily improving from here over the next few years, as well.
Each of these consumer staples is well positioned ahead of an environment likely to be favorable to turnaround stocks.
To learn more about turnaround investing and which stocks I’m targeting, subscribe to Cabot Turnaround Letter today.
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