Consumer staples stocks outperformed as investors seek defensive stocks, boosted by factors such as record inflation and Russia’s war in Ukraine. Yet that dispute has caused already high commodity prices to spike, raising fears that U.S. consumers are reaching a breaking point and shunning brand names in favor of cheaper private label offerings.
Still, the calculation of commodity stocks may not be as imminent as feared.
First, the bad news: although wages have risen, they have not kept pace with the rising cost of living, as evidenced by recent readings on key metrics. Data last week showed consumer prices climbed for a seventh consecutive month at an annual rate of 8.5% in March, extending a string of 40-year highs, while producer prices fell. jumped 11.2%, the biggest increase on record since data collection began in 2010. That left many investors bracing for higher inflation for longer.
Additionally, pressure from higher prices is starting to kick in: Nielsen readings covering the four weeks to the end of March revealed that private label products outperformed brands for the first time after six consecutive months of underperformance. , recording year-over-year sales growth of 7%.
Then there’s the fact that interest rates are rising, making high-dividend payers like commodities less attractive, given that they have to compete with the rising yields of lower-risk bonds.
So far, however, this hasn’t shaken stocks:
Consumer Staples Select Sector SPDR
The exchange-traded fund (XLP) is up more than 7% in the past month and 2.3% since the start of the year, two periods when the S&P 500 is in the red.
This trend seems to have legs, for several reasons. First, private label has yet to take a significant share – Nielsen data showed that brands still saw a 4% increase in sales in the most recent period. High consumer savings rates won’t last forever, but they have helped cushion the blow. That means bulkier items can feel the pinch before smaller essentials, especially as brand loyalty has increased for many businesses during the pandemic when we were all at home snacking. And the most recent reading on retail sales showed consumers haven’t pulled back significantly despite soaring gasoline prices.
This has allowed consumer product manufacturers to raise prices almost at the same pace, passing the rising costs on to the consumer without hurting demand too much. The fact that this is true across the industry has staved off concerns of price wars eroding margins.
“Companies act the same way and everyone makes similar decisions” about pricing, said Stephens analyst Ben Bienvenu. “It’s when someone swims the other way that things go awry.”
It also left consumers without many options. If the prices of private and branded products have risen, they may choose to stick with the latter, if the former does not offer substantial savings.
“You’re going to eat your cereal one way or another, and you can’t switch from cereal to eggs because the price of eggs has also gone up a lot,” says Matt Dmytryszyn, chief investment officer at the consultancy. financial Telemus. Additionally, soaring prices for things like produce and meat could lead more consumers to turn to packaged foods. “This will benefit a wide range of consumer packaged goods companies, not just private label,” he said.
Worries about a recession may be overblown in the short term, but investors and consumers have grown more nervous about the possibility. It should therefore be noted that historically, big brands have done quite well in tough economic times, thanks to scale advantages in operations, the ability to command more storage space from retailers, and balance sheets. stronger to withstand price drops, should they become necessary. .
Yet consumer brands also appear particularly well-positioned at present, as the pandemic has helped reverse longer-term trends that had favored private label, says Burns McKinney, managing director and senior portfolio manager at
NFJ Investment Group
“As more and more consumers shop online, private label has lost out to national brands since the onset of Covid,” McKinney says. “Over most of the past decade, small disruptive businesses have made gains, especially among millennial shoppers; the shift to digital shopping has made name recognition more crucial and led to a rebound in brand loyalty. »
He also notes that inflation can make dividend-paying stocks more attractive as a whole, given that they are making money for shareholders today, compared to higher-growth sectors like technology, where Earnings and expected future cash flows seem less valuable in an inflationary environment. environment.
Analysts expect a number of consumer staples stocks to post rather modest per-share gains this year, following pandemic-spurred gains in 2020 and 2021.
Yet it should be noted that companies, including
Philip Morris International
J. M. Smucker
Molson Coors Beverages
(TAP) should all see EPS holding up relatively well, while paying a dividend and trading at 18x forward earnings or lower.
That said, private label seems set to regain ground in an environment where consumers are focused on value, a phenomenon that Barrons noted should help discounters like
(WMT). But industry fragmentation means there aren’t many pure-play options for investors.
(THS) is an option – recent underperformance linked to operational missteps means the stock is trading at just over 20 times forward earnings, not much above its historical average, although the analysts expect EPS to jump nearly 90% year-over-year next year. It could also benefit from changes arising from the involvement of activist investors.
All that to say, consumer stock investors can have their cake — and their cereal, ketchup, and cookies — and eat it, too.
Write to Teresa Rivas at [email protected]