Institutions Are Buying Under Appreciated Consumer Staples Now

October 04, 2023 at 11:10 AM EDT

Consumer staples stocks

Consumer staples names have lagged over the past year as tough comps and shifting consumer habits cut into the outlook. The trends have many of these stocks trading at significant discounts to their historical price action and some offering deep-value and high yields. While these stocks don’t offer a robust outlook for growth, they offer an outlook for steady business, improving profitability, dividend coverage, and distribution growth that outpaces the broad market.

While those characteristics make them attractive, their share prices could trend lower or wallow at current lows indefinitely, but there is a catalyst for upward movement. Stocks like Medifast (NYSE: MED), Archer-Daniels-Midland (NYSE: ADM), and Kraft Heinz (NASDAQ: KHC) are being bought by the institutions, and analysts see them moving higher. Assuming these businesses can continue to perform as expected, their share prices should appreciate over time while paying market-beating yields.

Medifast Hurt By Diet Pill Market Outlook

A slew of new weight loss drugs are hitting the market and have hurt the outlook for weight loss supplement and management companies like Medifast. Medifast business is in decline compared to last year, but that is compared to record levels and the pandemic bubble. The business is normalizing above the 2019 levels, which means robust dividend coverage for this 8.5% yielding stock.

The dividend coverage is running at roughly 2X the payout. The payout ratio is about 50% of the full-year outlook, given the company’s outperformance in the first half and the balance sheet. As of the latest report, the company’s cash position is nearly double compared to last year, and there is no interest-bearing debt. This has the company set up to continue raising the dividend, if not at the double-digit CAGR of previous years.

The yield and the value, about 9X earnings, are why institutions buy this stock. The institutions own about 88% of the company and have been buying on balance for 4 consecutive quarters. One noteworthy buyer is Point72, founded by Stephen Cohen, which purchased nearly 0.50% of the stock in Q3.

Med Stock chart

Archer-Daniels-Midland: Serving the Consumer Food Industry

Archer-Daniels-Midland is well-positioned as the middleman between farmers and consumer foods manufacturers. It handles and processes agricultural commodities to provide useable products for food manufacturers and industry. This stock trades at nearly 11X its earnings, providing a value relative to its sector and the broad market while paying a 2.35% yield.

Institutions own about 78% of this stock and have been buying on balance for 4 consecutive quarters. They have put a floor in the market near $75, and the price action is heading toward it. Analysts also see this stock moving higher, more than 25%, so a bottom should be reached soon.

AMD stock chart

Kraft Heinz At Rock Bottom

Shares of Kraft Heinz corrected within a trading range this year and hit the bottom of the range in Q3. That coincided with a surge in institutional activity, leading to a rebound in the price action. Institutions have bought this stock on balance for 7 consecutive quarters, so the spike is telling. They own about 75% of the stock, with Warren Buffet and Berkshire Hathaway holding nearly half.

The analysts have been trimming their price targets for KHC this year but still see it moving up about 22%, which is well above last year’s consensus figure. The low price target assumes the market is fairly valued near the bottom of the range, which helps confirm the bottom of the market. The next catalyst for KHC is the Q3 earnings report due at the end of October. The analysts have been trimming their targets so the bar could be set low. A solid report could add momentum to an already-rebounding market in that scenario.

KHC stock chart

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Institutions Are Buying Under Appreciated Consumer Staples Now

Medifast Hurt By Diet Pill Market Outlook

Archer-Daniels-Midland: Serving the Consumer Food Industry

Kraft Heinz At Rock Bottom

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