Consumer staples stocks are solid insurance policies in frothy markets ripe for corrections. On the other hand, they usually underperform during bull runs, and this paradigm has rung true over the past six months as the sector’s 1.9% return has fallen short of the S&P 500’s 7.9% 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.
Clorox (CLX)
Market Cap: $10.88 billion
Founded in 1913 with bleach as the sole product offering, Clorox (NYSE: CLX) today is a consumer products giant whose product portfolio spans everything from bleach to skincare to salad dressing to kitty litter.
Why Do We Think Twice About CLX?
- Sales tumbled by 1.9% annually over the last three years, showing consumer trends are working against its favor
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Capital intensity has ramped up over the last year as its free cash flow margin decreased by 5.8 percentage points
Clorox’s stock price of $90.03 implies a valuation ratio of 14.2x forward P/E. If you’re considering CLX for your portfolio, see our FREE research report to learn more.
Conagra (CAG)
Market Cap: $6.73 billion
Founded in 1919 as Nebraska Consolidated Mills in Omaha, Nebraska, Conagra Brands today (NYSE: CAG) boasts a diverse portfolio of packaged foods brands that includes everything from whipped cream to jarred pickles to frozen meals.
Why Should You Sell CAG?
- Falling unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 13.8% annually, worse than its revenue
- Free cash flow margin shrank by 4.8 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
Conagra is trading at $14.20 per share, or 8.2x forward P/E. To fully understand why you should be careful with CAG, check out our full research report (it’s free).
Mission Produce (AVO)
Market Cap: $964.2 million
Founded in 1983 in California, Mission Produce (NASDAQ: AVO) grows, packages, and distributes avocados.
Why Are We Out on AVO?
- Subscale operations are evident in its revenue base of $1.34 billion, meaning it has fewer distribution channels than its larger rivals
- Forecasted revenue decline of 17% for the upcoming 12 months implies demand will fall off a cliff
- Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 12% that must be offset through higher volumes
At $13.29 per share, Mission Produce trades at 21.7x forward P/E. Read our free research report to see why you should think twice about including AVO in your portfolio.
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