Consumer staples stocks are solid insurance policies in frothy markets ripe for corrections. 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 5.6% while the S&P 500 was up 10.8%.
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.
Campbell's (CPB)
Market Cap: $7.00 billion
With its iconic canned soup as its cornerstone product, Campbell's (NASDAQ: CPB) is a packaged food company with an illustrious portfolio of brands.
Why Is CPB Risky?
- Declining unit sales over the past two years imply it may need to invest in product improvements to get back on track
- Forecasted revenue decline of 2.6% for the upcoming 12 months implies demand will fall off a cliff
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
Campbell's is trading at $23.46 per share, or 12.9x forward P/E. To fully understand why you should be careful with CPB, check out our full research report (it’s free).
Freshpet (FRPT)
Market Cap: $3.62 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 Does FRPT Give Us Pause?
- Revenue base of $1.18 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Low free cash flow margin of 2.4% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- ROIC of 0.6% reflects management’s challenges in identifying attractive investment opportunities
Freshpet’s stock price of $75.26 implies a valuation ratio of 46.1x forward P/E. Read our free research report to see why you should think twice about including FRPT in your portfolio.
Simply Good Foods (SMPL)
Market Cap: $968.6 million
Best known for its Atkins brand that was inspired by the popular diet of the same name, Simply Good Foods (NASDAQ: SMPL) is a packaged food company whose offerings help customers achieve their healthy eating or weight loss goals.
Why Do We Steer Clear of SMPL?
- Muted 5.2% annual revenue growth over the last three years shows its demand lagged behind its consumer staples peers
- Sales are projected to tank by 8.3% over the next 12 months as demand evaporates
- Efficiency has decreased over the last year as its operating margin fell by 31.9 percentage points
At $10.90 per share, Simply Good Foods trades at 6.6x forward P/E. Dive into our free research report to see why there are better opportunities than SMPL.
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