Consumer staples stocks are solid insurance policies in frothy markets ripe for corrections. The flip side is that they frequently fall behind growth industries when times are good, and this was the reality over the past six months as the sector’s flat performance trailed the S&P 500’s 10.5% gain.
Given the low switching costs of basic goods like paper towels, many companies will continue generating poor results while only a handful will shine. Taking that into account, here are three consumer stocks that may face trouble.
J. M. Smucker (SJM)
Market Cap: $11.79 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 Do We Steer Clear of SJM?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Efficiency has decreased over the last year as its operating margin fell by 27.1 percentage points
- ROIC of 2.2% reflects management’s challenges in identifying attractive investment opportunities, and its falling returns suggest its earlier profit pools are drying up
J. M. Smucker is trading at $110.74 per share, or 11.7x forward P/E. To fully understand why you should be careful with SJM, check out our full research report (it’s free).
Nature's Sunshine (NATR)
Market Cap: $297.2 million
Started on a kitchen table in Utah, Nature’s Sunshine (NASDAQ: NATR) manufactures and sells nutritional and personal care products.
Why Does NATR Worry Us?
- Sales stagnated over the last three years and signal the need for new growth strategies
- Modest revenue base of $460.8 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Estimated sales growth of 1.3% for the next 12 months is soft and implies weaker demand
Nature's Sunshine’s stock price of $16.52 implies a valuation ratio of 21.1x forward P/E. Read our free research report to see why you should think twice about including NATR in your portfolio.
Fresh Del Monte Produce (FDP)
Market Cap: $1.74 billion
Translating to "of the mountain" in Spanish, Fresh Del Monte (NYSE: FDP) is a leader in providing high-quality, sustainably grown fresh fruits and vegetables.
Why Do We Think FDP Will Underperform?
- Products fail to spark excitement with consumers, as seen in its flat sales over the last three years
- Commoditized products, bad unit economics, and high competition are reflected in its low gross margin of 8.3%
- Underwhelming 5.4% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $36.28 per share, Fresh Del Monte Produce trades at 16x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than FDP.
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