Consumer staples are considered safe havens in turbulent markets due to their inelastic demand profiles. 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 4.2% while the S&P 500 was up 9%.
Given the low switching costs of basic goods like paper towels, many companies will continue generating poor results while only a handful will shine. Taking that into account, here are three consumer stocks we’re passing on.
Church & Dwight (CHD)
Market Cap: $23 billion
Best known for its Arm & Hammer baking soda, Church & Dwight (NYSE: CHD) is a household and personal care products company with a vast portfolio that spans laundry detergent to toothbrushes to hair removal creams.
Why Are We Cautious About CHD?
- 4.1% annual revenue growth over the last three years was slower than its consumer staples peers
- 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 are flat for the next 12 months, implying demand will slow from its three-year trend
At $95.63 per share, Church & Dwight trades at 24.8x forward P/E. Dive into our free research report to see why there are better opportunities than CHD.
The Marzetti Company (MZTI)
Market Cap: $3.00 billion
Known for its frozen garlic bread and Parkerhouse rolls, The Marzetti Company (NASDAQ: MZTI) sells bread, dressing, and dips to the retail and food service channels.
Why Does MZTI Worry Us?
- Lackluster 1.8% annual revenue growth over the last three years indicates the company is losing ground to competitors
- Revenue base of $1.92 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Gross margin of 23.5% is an output of its commoditized products
The Marzetti Company’s stock price of $107.06 implies a valuation ratio of 15.1x forward P/E. Check out our free in-depth research report to learn more about why MZTI doesn’t pass our bar.
Edgewell Personal Care (EPC)
Market Cap: $997.7 million
Boasting brands such as Banana Boat, Schick, and Skintimate, Edgewell Personal Care (NYSE: EPC) sells personal care products in the skin and sun care, shave, and feminine care categories.
Why Should You Dump EPC?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Inability to adjust its cost structure while its revenue declined over the last year led to a 7.3 percentage point drop in the company’s operating margin
- Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable
Edgewell Personal Care is trading at $23.11 per share, or 11.5x forward P/E. Read our free research report to see why you should think twice about including EPC in your portfolio.
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