Regarded as defensive investments, consumer staples stocks are generally safe bets in choppy markets. On the other hand, they usually underperform during bull runs, and this paradigm has rung true over the past six months as the sector was flat while the S&P 500 returned 17.7%.
Some companies can buck this trend, but the odds aren’t great for the ones we’re analyzing today. With that said, here are three consumer stocks that may face trouble.
Reynolds (REYN)
Market Cap: $4.91 billion
Best known for its aluminum foil, Reynolds (NASDAQ: REYN) is a household products company whose products focus on food storage, cooking, and waste.
Why Do We Pass on REYN?
- Shrinking unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- 5.8 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position
At $23.35 per share, Reynolds trades at 14.4x forward P/E. Read our free research report to see why you should think twice about including REYN in your portfolio.
Flowers Foods (FLO)
Market Cap: $3.01 billion
With Wonder Bread as its premier brand, Flower Foods (NYSE: FLO) is a packaged foods company that focuses on bakery products such as breads, buns, and cakes.
Why Does FLO Worry Us?
- Declining unit sales over the past two years imply it may need to invest in product improvements to get back on track
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- Earnings per share have contracted by 1.4% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Flowers Foods is trading at $14.39 per share, or 13x forward P/E. Dive into our free research report to see why there are better opportunities than FLO.
Estée Lauder (EL)
Market Cap: $31.24 billion
Named after its founder, who was an entrepreneurial woman from New York with a passion for skincare, Estée Lauder (NYSE: EL) is a one-stop beauty shop with products in skincare, fragrance, makeup, sun protection, and men’s grooming.
Why Does EL Fall Short?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Operating profits fell over the last year as its sales dropped and it struggled to adjust its fixed costs
- Sales were less profitable over the last three years as its earnings per share fell by 40.8% annually, worse than its revenue declines
Estée Lauder’s stock price of $86.51 implies a valuation ratio of 39.4x forward P/E. If you’re considering EL for your portfolio, see our FREE research report to learn more.
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