As Chief Analyst of the Cabot Turnaround Letter, I’ve been working to streamline the stock discovery process, something that’s increasingly valuable in a market that’s begun looking beyond just the largest tech stocks.
To do so, I’ve opted to focus on two dominant themes that are likely to drive the market higher from here:
- Sectors that look to strengthen in a falling bond rate environment (of which we’re clearly in the early stages); and
- 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.
Of note, one sector in particular appears to be benefiting from these catalysts, namely, consumer staples.
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.
There has 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.
The consumer staples sector tracker, the Consumer Staples Select Sector SPDR ETF (XLP) is likely a prime beneficiary of the rise in defensiveness among investors, and the ETF has strengthened considerably in the last few months.
So, let’s dig a bit deeper in our search to uncover two consumer staples stocks primed for a turnaround in an increasingly defensive environment.
2 Turnaround Stocks for a Defensive Market
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.
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.
