Regarded as defensive investments, consumer staples stocks are generally safe bets in choppy markets. But they’re also double-edged swords as they often lag in booming conditions, and this pattern has persisted recently. Over the past six months, the industry has recorded a loss of 2.4%, disappointing since the S&P 500 climbed 6.2%.
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 we’re passing on.
Reynolds (REYN)
Market Cap: $4.94 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 Should You Sell REYN?
- Flat unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
- Sales are projected to be flat over the next 12 months and imply weak demand
- Gross margin of 25.4% is below its competitors, leaving less money to invest in areas like marketing and production facilities
At $26.31 per share, Reynolds trades at 16x forward P/E. Dive into our free research report to see why there are better opportunities than REYN.
Lamb Weston (LW)
Market Cap: $6.23 billion
Best known for its Grown in Idaho brand, Lamb Weston (NYSE: LW) produces and distributes potato products such as frozen french fries and mashed potatoes.
Why Should You Dump LW?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- Earnings per share have dipped by 9.8% annually over the past three years, which is concerning because stock prices follow EPS over the long term
Lamb Weston is trading at $44.63 per share, or 15.8x forward P/E. If you’re considering LW for your portfolio, see our FREE research report to learn more.
Vital Farms (VITL)
Market Cap: $471.3 million
With an emphasis on ethically produced products, Vital Farms (NASDAQ: VITL) specializes in pasture-raised eggs and butter.
Why Are We Cautious About VITL?
- Subscale operations are evident in its revenue base of $784.4 million, meaning it has fewer distribution channels than its larger rivals
- Demand will likely fall over the next 12 months as Wall Street expects flat revenue
- Capital intensity has ramped up over the last year as its free cash flow margin decreased by 14 percentage points
Vital Farms’s stock price of $10.78 implies a valuation ratio of 75.3x forward EV-to-EBITDA. To fully understand why you should be careful with VITL, check out our full research report (it’s free).
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