Consumer staples stocks are solid insurance policies in frothy markets ripe for corrections. 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 has recorded a loss of 6.8%, a far cry from the S&P 500’s 11.7% ascent.
Investors should tread carefully as the low switching costs for everyday products mean that not all businesses are created equal. Taking that into account, here are three consumer stocks we would avoid.
Boston Beer (SAM)
Market Cap: $1.86 billion
Known for its flavorful beverages challenging the status quo, Boston Beer (NYSE: SAM) is a pioneer in craft brewing and a symbol of American innovation in the alcoholic beverage industry.
Why Do We Think SAM Will Underperform?
- Annual sales declines of 2.2% for the past three years show its products struggled to connect with the market
- Operating margin declined by 9.9 percentage points over the last year as its sales cratered
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its shrinking returns suggest its past profit sources are losing steam
Boston Beer’s stock price of $184.94 implies a valuation ratio of 18.8x forward P/E. Dive into our free research report to see why there are better opportunities than SAM.
Zevia (ZVIA)
Market Cap: $122.7 million
With a primary focus on soda but also a presence in energy drinks and teas, Zevia (NYSE: ZVIA) is a better-for-you beverage company.
Why Does ZVIA Worry Us?
- Sales were flat over the last three years, indicating it’s failed to expand its business
- Modest revenue base of $169.8 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Historical operating margin losses point to an inefficient cost structure
Zevia is trading at $1.66 per share, or 0.7x forward price-to-sales. Read our free research report to see why you should think twice about including ZVIA in your portfolio.
Bunge Global (BG)
Market Cap: $20.48 billion
With origins dating back to 1818 and operations spanning both hemispheres to balance seasonal harvests, Bunge Global (NYSE: BG) is an agribusiness and food company that processes oilseeds, grains, and other agricultural commodities into vegetable oils, protein meals, flours, and specialty ingredients.
Why Does BG Fall Short?
- Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 5.4% that must be offset through higher volumes
- Earnings per share fell by 16% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable
- Poor free cash flow margin of -0.9% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $106.17 per share, Bunge Global trades at 9.9x forward P/E. To fully understand why you should be careful with BG, check out our full research report (it’s free).
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