Consumer staples are considered safe havens in turbulent markets due to their inelastic demand profiles. 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 7.9%, a far cry from the S&P 500’s 6.7% ascent.
Investors should tread carefully as the low switching costs for everyday products mean that not all businesses are created equal. On that note, here are three consumer stocks we’re passing on.
Conagra (CAG)
Market Cap: $12.12 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 Do We Pass on CAG?
- Declining unit sales over the past two years imply it may need to invest in product improvements to get back on track
- Sales are projected to tank by 1.4% over the next 12 months as demand evaporates
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 6.2 percentage points
At $25.40 per share, Conagra trades at 9.6x forward price-to-earnings. To fully understand why you should be careful with CAG, check out our full research report (it’s free).
Kellanova (K)
Market Cap: $28.44 billion
With Corn Flakes as its first and most iconic product, Kellanova (NYSE:K) is a packaged foods company that is dominant in the cereal and snack categories.
Why Are We Hesitant About K?
- Falling unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
- Sales are projected to be flat over the next 12 months and imply weak demand
- Earnings per share have contracted by 2.5% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Kellanova is trading at $82.80 per share, or 21x forward price-to-earnings. Check out our free in-depth research report to learn more about why K doesn’t pass our bar.
SunOpta (STKL)
Market Cap: $665.7 million
Committed to clean-label foods, SunOpta (NASDAQ:STKL) is a sustainability-focused food and beverage company specializing in the sourcing, processing, and packaging of organic products.
Why Does STKL Give Us Pause?
- Annual sales declines of 3.8% for the past three years show its products struggled to connect with the market
- Modest revenue base of $724 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 16.6% that must be offset through higher volumes
SunOpta’s stock price of $5.47 implies a valuation ratio of 21.5x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than STKL.
Stocks We Like More
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Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like United Rentals (+322% five-year return). Find your next big winner with StockStory today for free.
