Consumer staples have slipped from their highs, but some have been unfairly swept under the rug.
In 2022, staples weren’t immune to market turmoil, but they were safer than many other sectors: Consumers kept buying products despite higher prices, and the companies’ steady earnings growth offered safe harbor amid selloffs in riskier assets. By contrast, this year’s decidedly greater appetite for risk, along with bid-up valuations, have left staples trailing.
It’s unlikely we’ll return to a scenario where the broader environment supports almost all packaged-goods stocks, but that doesn’t mean there aren’t individual staples companies worth snapping up, writes
‘s Filippo Falorni, who initiated coverage of the sector on Friday.
He notes that companies across the board were able to push through price increases last year, helping shield margins from higher input costs. However, we’re now approaching a point where sales will start to feel the pinch of budget-conscious consumers. Despite the sector’s year-to-date lag, companies’ multiples are still fairly high, and now looks like a prime time to get choosy about which staples stocks are still worth buying.
Specifically, Falorni writes that investors can do so by “focusing on quality names with true pricing power and structural growth drivers…Our view is that companies with real pricing power (i.e. strong brands with historical investments, low private-label penetration, channel diversity, emerging market exposure) will be in a better position to cycle 2022 price increases.”
Falorni notes that many companies will benefit somewhat from easing commodity prices, and that subsectors such as beverages and beauty enjoy some insulation given less private-label penetration and stronger brand power, both of which provide greater ability to raise prices.
His favorite stock is
(CL): Falorni has an $84 price target on the stock, which he thinks can see sustained sales growth thanks to its pricing power.
Procter & Gamble
(PG) is his second pick, and he has a $160 price target on the stock, as he believes the company’s recent strategic changes will soon start to bear fruit.
Falorni’s other Buy-rated favorites are
(EL), with price targets of $265, $68, $121, and $295, respectively.
By contrast he has Sell ratings on
(BFB) stock, with respective price targets of $120 and $62. He worries that the former will see some of the lowest profit and sales growth of the group, while the latter grapples with a rich valuation that doesn’t reflect a likely reversion to more-normal levels of sales growth.
Barron’s has previously noted that while some staples are pricey, others—and beverages in particular—have so far been able to justify their higher multiples. Although if 2023’s more risk-driven rally should fade, the group in general might be able to once again command higher prices.
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