Regarded as defensive investments, consumer staples stocks are generally safe bets in choppy markets. The flip side is that they frequently fall behind growth industries when times are good, and this was the reality over the past six months as the sector’s 1% return has trailed the S&P 500 by 6.1 percentage points.
Investors should tread carefully as the low switching costs for everyday products mean that not all businesses are created equal. On that note, here are three consumer stocks best left ignored.
Spectrum Brands (SPB)
Market cap: $1.92 billion
A leader in multiple consumer product categories, Spectrum Brands (NYSE: SPB) is a diversified company with a portfolio of trusted brands spanning home appliances, garden care, personal care, and pet care.
Why Do We Avoid SPB?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Projected sales for the next 12 months are flat and suggest demand will be subdued
- ROIC of 1.1% reflects management’s challenges in identifying attractive investment opportunities
Spectrum Brands’s stock price of $83.52 implies a valuation ratio of 15.2x forward P/E. Dive into our free research report to see why there are better opportunities than SPB.
Mission Produce (AVO)
Market cap: $1.01 billion
Founded in 1983 in California, Mission Produce (NASDAQ: AVO) grows, packages, and distributes avocados.
Why Are We Wary of AVO?
- Modest revenue base of $1.34 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 11.2% that must be offset through higher volumes
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Mission Produce is trading at $11.51 per share, or 16.3x forward P/E. To fully understand why you should be careful with AVO, check out our full research report (it’s free).
Mondelez (MDLZ)
Market cap: $82.2 billion
Founded as Nabisco in 1903, Mondelez (NASDAQ: MDLZ) is a packaged snacks powerhouse best known for its Oreo, Cadbury, Toblerone, Ritz, and Trident brands.
Why Do We Think Twice About MDLZ?
- Declining unit sales over the past two years suggest it might have to lower prices to stimulate growth
- Estimated sales growth of 1.5% for the next 12 months implies demand will slow from its three-year trend
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
At $65.00 per share, Mondelez trades at 18.5x forward P/E. If you’re considering MDLZ for your portfolio, see our FREE research report to learn more.
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