Consumer staples are considered safe havens in turbulent markets due to their inelastic demand profiles. 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 7.6% while the S&P 500 was up 4.1%.
Investors should tread carefully as the low switching costs for everyday products mean that not all businesses are created equal. On that note, here are three consumer stocks we’re steering clear of.
Kimberly-Clark (KMB)
Market Cap: $42.32 billion
Originally founded as a Wisconsin paper mill in 1872, Kimberly-Clark (NYSE: KMB) is now a household products powerhouse known for personal care and tissue products.
Why Is KMB Not Exciting?
- Products fail to spark excitement with consumers, as seen in its flat sales over the last three years
- Flat unit sales over the past two years suggest it might have to lower prices to stimulate growth
- Projected sales decline of 3.1% for the next 12 months points to an even tougher demand environment ahead
Kimberly-Clark’s stock price of $128.29 implies a valuation ratio of 16.8x forward P/E. If you’re considering KMB for your portfolio, see our FREE research report to learn more.
TreeHouse Foods (THS)
Market Cap: $1.01 billion
Whether it be packaged crackers, broths, or beverages, Treehouse Foods (NYSE: THS) produces a wide range of private-label foods for grocery and food service customers.
Why Should You Dump THS?
- Falling unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
- Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 16.4% that must be offset through higher volumes
- Low returns on capital reflect management’s struggle to allocate funds effectively
TreeHouse Foods is trading at $20.01 per share, or 10.3x forward P/E. Dive into our free research report to see why there are better opportunities than THS.
Tyson Foods (TSN)
Market Cap: $19.03 billion
Started as a simple trucking business, Tyson Foods (NYSE: TSN) is one of the world’s largest producers of chicken, beef, and pork.
Why Is TSN Risky?
- Sizable revenue base leads to growth challenges as its 1.5% annual revenue increases over the last three years fell short of other consumer staples companies
- Gross margin of 7.1% is an output of its commoditized products
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
At $53.72 per share, Tyson Foods trades at 14.3x forward P/E. Check out our free in-depth research report to learn more about why TSN doesn’t pass our bar.
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