Regarded as defensive investments, consumer staples stocks are generally safe bets in choppy markets. The flip side is that they frequently fall behind growth industries when times are good, and this perception became a reality over the past six months as the sector was down 8.4% while the S&P 500 was up 5.6%.
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 swiping left on.
J&J Snack Foods (JJSF)
Market Cap: $2.31 billion
Best known for its SuperPretzel soft pretzels and ICEE frozen drinks, J&J Snack Foods (NASDAQ: JJSF) produces a range of snacks and beverages and distributes them primarily to supermarket and food service customers.
Why Does JJSF Worry Us?
- Subscale operations are evident in its revenue base of $1.59 billion, meaning it has fewer distribution channels than its larger rivals
- Estimated sales growth of 2.8% for the next 12 months implies demand will slow from its three-year trend
- ROIC of 6.6% reflects management’s challenges in identifying attractive investment opportunities
J&J Snack Foods is trading at $118.55 per share, or 23.3x forward P/E. If you’re considering JJSF for your portfolio, see our FREE research report to learn more.
J. M. Smucker (SJM)
Market Cap: $10.98 billion
Best known for its fruit jams and spreads, J.M Smucker (NYSE: SJM) is a packaged foods company whose products span from peanut butter and coffee to pet food.
Why Is SJM Risky?
- 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
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 23.7 percentage points
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging
At $102.62 per share, J. M. Smucker trades at 10x forward P/E. Read our free research report to see why you should think twice about including SJM in your portfolio.
Tilray (TLRY)
Market Cap: $426.7 million
Founded in 2013, Tilray Brands (NASDAQ: TLRY) engages in cannabis research, cultivation, and distribution, offering a range of medical and recreational cannabis products, hemp-based foods, and alcoholic beverages.
Why Are We Out on TLRY?
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 70.1 percentage points
- Earnings per share fell by 60.5% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable
- Increased cash burn over the last year raises questions about the return timeline for its investments
Tilray’s stock price of $0.42 implies a valuation ratio of 5.3x forward EV-to-EBITDA. To fully understand why you should be careful with TLRY, check out our full research report (it’s free).
Stocks We Like More
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