Consumer staples are considered safe havens in turbulent markets due to their inelastic demand profiles. But they’re also double-edged swords as they often lag in booming conditions, and this pattern has persisted recently. Over the past six months, the industry recorded a flat return while the S&P 500 was up 9.1%.
Investors should tread carefully as the low switching costs for everyday products mean that not all businesses are created equal. Keeping that in mind, here are three consumer stocks we would avoid.
Cal-Maine (CALM)
Market Cap: $2.83 billion
Known for brands such as Egg-Land’s Best and Land O’ Lakes, Cal-Maine (NASDAQ: CALM) produces, packages, and distributes eggs.
Why Are We Hesitant About CALM?
- Sales tumbled by 5% annually over the last three years, showing consumer trends are working against it
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 54.9% annually, worse than its revenue
- Capital intensity has ramped up over the last year as its free cash flow margin decreased by 28.9 percentage points
At $63.04 per share, Cal-Maine trades at 1.2x forward price-to-sales. To fully understand why you should be careful with CALM, check out our full research report (it’s free).
Hormel Foods (HRL)
Market Cap: $11.76 billion
Best known for its SPAM brand, Hormel (NYSE: HRL) is a packaged foods company with products that span meat, poultry, shelf-stable foods, and spreads.
Why Do We Steer Clear of HRL?
- Declining unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
- Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 16.1% that must be offset through higher volumes
- Earnings per share have contracted by 5.8% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Hormel Foods is trading at $21.33 per share, or 13.4x forward P/E. If you’re considering HRL for your portfolio, see our FREE research report to learn more.
United Natural Foods (UNFI)
Market Cap: $2.85 billion
With a vast network of 55 distribution centers spanning approximately 30 million square feet of warehouse space, United Natural Foods (NYSE: UNFI) is North America's premier grocery wholesaler distributing natural, organic, and conventional products to over 30,000 retail locations across the US and Canada.
Why Is UNFI Risky?
- Sales stagnated over the last three years and signal the need for new growth strategies
- Gross margin of 13.4% is below its competitors, leaving less money to invest in areas like marketing and production facilities
- Underwhelming 2.7% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its falling returns suggest its earlier profit pools are drying up
United Natural Foods’s stock price of $47 implies a valuation ratio of 13.9x forward P/E. Read our free research report to see why you should think twice about including UNFI in your portfolio.
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