Regarded as defensive investments, consumer staples stocks are generally safe bets in choppy markets. The flip side is that they frequently fall behind growth industries when times are good, and this perception became a reality over the past six months as the sector was down 2.4% while the S&P 500 was up 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 steering clear of.
Constellation Brands (STZ)
Market Cap: $24.54 billion
With a presence in more than 100 countries, Constellation Brands (NYSE: STZ) is a globally renowned producer and marketer of beer, wine, and spirits.
Why Is STZ Not Exciting?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Sales are projected to be flat over the next 12 months and imply weak demand
- ROIC of 9% reflects management’s challenges in identifying attractive investment opportunities, and its falling returns suggest its earlier profit pools are drying up
At $142.96 per share, Constellation Brands trades at 12.1x forward P/E. Read our free research report to see why you should think twice about including STZ in your portfolio.
Freshpet (FRPT)
Market Cap: $2.57 billion
Standing out from typical processed pet foods, Freshpet (NASDAQ: FRPT) is a pet food company whose product portfolio includes natural meals and treats for dogs and cats.
Why Are We Wary of FRPT?
- Subscale operations are evident in its revenue base of $1.14 billion, meaning it has fewer distribution channels than its larger rivals
- Low free cash flow margin of 1.6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- ROIC of 0.1% reflects management’s challenges in identifying attractive investment opportunities
Freshpet is trading at $52.60 per share, or 35.3x forward P/E. To fully understand why you should be careful with FRPT, check out our full research report (it’s free).
Utz (UTZ)
Market Cap: $630.4 million
Tracing its roots back to 1921 when Bill and Salie Utz began making potato chips in their kitchen, Utz Brands (NYSE: UTZ) offers salty snacks such as potato chips, tortilla chips, pretzels, cheese snacks, and ready-to-eat popcorn, among others.
Why Do We Steer Clear of UTZ?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Modest revenue base of $1.45 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Utz’s stock price of $7.10 implies a valuation ratio of 9.3x forward P/E. If you’re considering UTZ for your portfolio, see our FREE research report to learn more.
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