Procter & Gamble, maker of Dawn dishwashing soap, is a consumer-staples company whose shares may be looking attractive.
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Consumer-staple stocks are supposed to be steady, if not exciting, performers, but they’ve been in free fall in 2023. Yet even that hasn’t made many of them cheap enough for bargain shoppers.
Last year was a good one for staples as their reputation for safety served them well during the market’s downturn. This year has been a very different story: The market’s risk-driven 2023 rally has left investors with little appetite for staid consumer stocks, and the seemingly unstoppable Big Tech even snatched the mantle of defensive safe haven during this spring’s banking worries.
Meanwhile higher interest rates have made their juicy dividends less attractive. Investors are also worried that weight-loss drugs will lower demand for food and beverages longer-term, while in the here and now brands are seeing a natural drop off from pandemic-boom when everyone was eating and cleaning at home.
The upshot is that while the
S&P 500
has rallied some 13% year to date, the
Consumer Staples Select Sector SPDR
exchange-traded fund (ticker: XLP) has fallen roughly 9%. Yet even with this decline, the stocks’ valuations don’t look particularly tempting, making it difficult to jump into the sector aside from some select names.
That’s left staples in a kind of purgatory, with little indication of what will boost its prospects near term. Or as Wells Fargo analyst Chris Carey puts it, we’ve gone from a “staple-topia…to a staple-dystopia.”
“After the best year vs the market in a generation in 2022, it was always a tough setup into 2023, then writing was really on the wall at summer,” he writes in a new note. “But, the ferocity of the latest move has been something to behold (rates, volume, GLP-1, more). The challenge is we’re unlikely to see the fundamental inflection needed to get things going in the third quarter (volumes) and valuations, while much better, aren’t screaming cheap.”
He notes that exchange rates remain a problem for multinational players, while higher prices appear to still be weighing on volumes, as inflation-weary consumers naturally have pulled back.
In addition, while the concerns about Ozempic have led some investors to flock to home and personal-care names over food and beverages, those stocks’ valuations are now relatively higher.
All that goes a long way to explain the “great reset” in staples, as Carey terms it. “After the best year versus the market since 2008 (in 2022), Staples is underperforming the market year to date, and remains on track for the worst year vs the market in at least 20 years (worse than 2003).”
He’s not alone in that assessment. “In the U.S., we see mounting pressures on consumers from persistent inflation, rising interest rates, and the resumption of student-loan repayments,” wrote Citi Research’s Filippo Falorni in a recent review of the sector. “For Consumer Staples companies (particularly the multinationals), headwinds on consumers are being further compounded by pressure from a strengthening U.S. dollar, rising oil prices, and higher borrowing costs.”
Indeed, third-quarter-earnings season has yet to begin in earnest, but the consumer-staples reports thus far have been mixed to say the least.
Ultimately that means investors may just have to wait some of the negativity out. Bernstein analyst Ivan Holman writes Monday that he believes the worries about weight-loss drugs are overdone, but has still adjusted his outlook on stocks to reflect their relative exposure as “the market can remain irrational for extended periods of time. No reason to be a hero.”
Still, there may be some contrarian winners in the sector. Carey argues investors can still count on “fundamental strength and clean stories,” which
Church & Dwight
(CHD) and
Procter & Gamble
(PG) have in spades: “Generally fundamentals steers the ship in Staples (before valuations) and these two seem to be moving in the right direction (vs many still seeing fundamentals normalize).”
He also thinks
Keurig Dr Pepper
stock (KDP) has simply gotten too cheap given its coffee business is improving, and cold beverages are displaying ongoing momentum.
All three will report results in the coming weeks, so grab some popcorn—if you haven’t stopped snacking.
Write to Teresa Rivas at [email protected]
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