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 3.5% while the S&P 500 was up 4.8%.
Given the low switching costs of basic goods like paper towels, many companies will continue generating poor results while only a handful will shine. Keeping that in mind, here are three consumer stocks we’re swiping left on.
Hershey (HSY)
Market Cap: $38.24 billion
Best known for its milk chocolate bar and Hershey's Kisses, Hershey (NYSE:HSY) is an iconic company known for its chocolate products.
Why Does HSY Fall Short?
- Declining unit sales over the past two years imply it may need to invest in product improvements to get back on track
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 13.5 percentage points
- Earnings per share fell by 9.5% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable
At $188.75 per share, Hershey trades at 22.4x forward P/E. Check out our free in-depth research report to learn more about why HSY doesn’t pass our bar.
Simply Good Foods (SMPL)
Market Cap: $1.13 billion
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 Think SMPL Will Underperform?
- Muted 6% annual revenue growth over the last three years shows its demand lagged behind its consumer staples peers
- Projected sales decline of 4.9% for the next 12 months points to a tough demand environment ahead
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 24.4 percentage points
Simply Good Foods’s stock price of $12.16 implies a valuation ratio of 7.3x forward P/E. Read our free research report to see why you should think twice about including SMPL in your portfolio.
Nature's Sunshine (NATR)
Market Cap: $471.1 million
Started on a kitchen table in Utah, Nature’s Sunshine (NASDAQ:NATR) manufactures and sells nutritional and personal care products.
Why Are We Hesitant About NATR?
- Annual revenue growth of 4.4% over the last three years was below our standards for the consumer staples sector
- Smaller revenue base of $480.1 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Subpar operating margin of 4.8% constrains its ability to invest in process improvements or effectively respond to new competitive threats
Nature's Sunshine is trading at $26.88 per share, or 23.5x forward P/E. If you’re considering NATR for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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