We recently compiled a list of the 10 Best Consumer Staples Stocks To Buy Now. In this article, we are going to take a look at where PepsiCo, Inc. (NASDAQ:PEP) stands against the other consumer staples stocks.
Consumer staples stocks are for the risk averse investor and for those who like to hedge their investment portfolios. Also known as consumer defensive stocks, these are often sizeable firms that operate in industries that see stable demand during economic downturns. Some such sectors include essential retailers and pharmaceuticals, since while an economic slowdown decimates demand for pricey products such as GPUs, food and daily essentials survive simply because consumers can’t live without them.
At the same time, not only do consumer staples stocks allow investors to ride out the storm in a dark economy, but they also provide them the chance to either grow their portfolio or earn a stable income in the form of dividends. Insider Monkey looked at consumer staples stocks that pay dividends as part of our coverage of 13 Best Consumer Staples Dividend Stocks To Buy Now. In this list, the stock with the highest dividend yield had a yield of a stunning 9.69% which came on the back of a stunning 54 years of consistent dividend growth.
Like their counterparts in the consumer cyclical stock category, consumer staples stocks are also dependent for the most part on the economy. These are sizeable and stable firms that pay impressive dividends as we’ve highlighted above. However, like all other stocks, consumer staples are also dependent on the business cycle. The business or the economic cycle is divided into four phases. These are the early phase, the mid phase, the late phase, and the recessionary phase. For staples, the late and recessionary phases are the best when it comes to returns. Even though the market has produced 20% in average returns per year in the early phase since 1962, consumer staples have consistently produced the strongest returns in the recessionary phase and remain in the green during the late phase.
Analyzing data for business cycles since 1962 shows that the average returns of consumer staples stocks during the recessionary and late phases sit at ~14% and 5%, respectively. Since averages are influenced by outliers, we can also subtract the market’s performance from staples stocks’ performance and take the midpoint of the results. Doing this reveals that while during the late stage, the returns become negligible (but not negative), in a recession, they actually gain a percentage point or so to sit at 15%! Not only does this indicate that staples broadly outperform the market in a recession, but a hit rate (the percentage of time periods in the business cycle periods in different cycles over time where the sector outperformed) of 100% indicates that the performance is consistent across all business cycles since 1962.
Since there’s a stark difference in the returns offered by consumer staples stocks during different periods of a business cycle, it becomes important to try to decipher which phase we’re in right now. Determining this is no easy task, and we can use two approaches. The first of these is to see what the professionals are saying. On this front, research from investment bank Morgan Stanley shares some details. It shows that the economy has been in a downturn since last year, which is synonymous with the mid of a late stage cycle or the start of a recession. We can also read economic indicators and try to match them with what is typically observed during a stage of the economic cycle. Analyzing three data points, namely the GDP growth rate, inflation, and retail inventories shows that GDP growth slowed down to 1.4% in Q1 2024 from a far more robust 3.4% in Q4 2023; inflation in April was 2.6% for the PCE in May 2024 and still higher than the Fed’s preferred 2%, and retail inventories jumped by 1% annually in February. These three metrics indicate that we might be in the late stage of the business cycle which comes before a recession.
Shifting gears, it’s also important to see which sectors within consumer staples stock can benefit from consumer spending during an economic downturn. According to the Labor Department, the relative importance of food at home and used cars grows during a recession. These sat at 8.64 and 1.91 for data collected between 2009 and 2010, and grew from 7.66 for food and 1.77 for cars in the boom period represented by data collected between 2005 and 2006. As an exercise, you can scan our list for which stocks might benefit from an uptick in spending for these products.
While consumer staples stocks can be worthwhile investments, their share price gains tend to be more muted compared to high-growth sectors like consumer technology or electric vehicles. This is because their underlying fundamentals and business models are not typically focused on rapid expansion. For instance, one of the most popular consumer staples stock indexes maintained by the S&P is up a respectable 8% year to date and 7.55% over the past twelve months. On the flip side, the benchmark index is up by 26% over the past twelve months, while the technology heavy stock indexes have delivered as much as 31% in appreciation.
At the same time, consumer staples stocks might also be the perfect place for investors to take refuge in the current stock market environment. The S&P benchmark index’s price to earnings ratio is 21, which is near historically high levels. Data from investment bank Goldman Sachs shows that a P/E ratio of 20 places it in the 85th percentile of the index’s ratios since 1990. Overvaluation concerns for the benchmark persisted in June 2024, with the latest survey from Bloomberg News showing that the majority of the 586 market participants surveyed believed that the market was more overvalued than cash and US credit.
Keeping up with the cautious sentiment, roughly half of the participants polled also believe that the market can undergo a correction of as much as 10% this year, and 31% of the participants surveyed also believe that negative news on the AI front could lead to a selloff, with 27% holding the opinion that stocks could fall if unemployment continues to increase. Within this turmoil, one of the few sectors that Goldman Sachs believes might offer investors some stability is consumer staples as they have lagged the broader market in performance (a fact that we also noted above in the form of a 23 percentage point difference between the consumer staples and the benchmark stock indexes).
With these details in mind, let’s take a look at some top consumer staples stocks to buy. Smart money often thinks ahead, so it might be worth seeing how the hedge funds are investing as investors brace for economic impact. If you’re interested in learning more about consumer staples, then you should read Top 20 Largest Consumer Staples Companies in the World.
Our Methodology
To make our list of the best consumer staples stocks to buy, we ranked the 40 most valuable consumer staples stocks by the number of hedge funds that had bought the shares in Q1 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close up of a glass of a refreshing carbonated beverage illustrating the company’s different beverages.
PepsiCo, Inc. (NASDAQ:PEP)
Number of Hedge Fund Investors In Q1 2024: 62
PepsiCo, Inc. (NASDAQ:PEP) is also a dominant force in the global carbonated beverages market. Since both PepsiCo, Inc. (NASDAQ:PEP) and Coca-Cola operate in the same industry, their performance is also dependent on similar trends. PepsiCo, Inc. (NASDAQ:PEP) and Coca-Cola tend to do well during periods of moderate inflation as they can grow revenue by increasing prices and maintaining tight cost control to ensure that the percentage of price increases is higher than the internal cost increases. At the same time, PepsiCo, Inc. (NASDAQ:PEP) also has to ensure that a slew of new products help it maintain market share in the developed world, and gain market share in the competitive and untapped developing world. PepsiCo, Inc. (NASDAQ:PEP) shares have lost roughly 3% year to date as investors believe that since inflation has started to drop, it can not aggressively grow its revenue by increasing prices.
During its Q1 2024 earnings call, PepsiCo, Inc. (NASDAQ:PEP)’s management commented on its hopes for the developing world and how success in the developed world might translate into success in the region:
I think our team in Europe is doing a fantastic work. It started with strong productivity, simplifying the business and driving cost control, eliminating duplication and then reinvesting that money back into our brands and becoming more competitive and also driving our availability and driving our brand preference. And that is a flywheel that is working for us across both developing and developed markets in Europe. Obviously, developing markets a bit more. So if you think about Eastern Europe markets are growing a little bit faster than Western Europe markets. Western Europe markets have been impacted a little bit in this first quarter by some of the negotiations, and that’s not atypical in Europe.
But I think we have a good flywheel in Europe, and Europe will be expanding its portfolio along the lines of what the US has been doing, which will give us additional consumers and additional penetration in households across developed and developing markets. So we feel good about the flywheel in Europe. But at the center of that is a very strong productivity, cost discipline and reinvestment strategy that is, in a way, what we’re trying to do across the full company, elevating our productivity and driving their investments both into affordability, availability, a better brand equity and then investing back into our future, digitalization and sustainability at the center of that investment. So it’s a flywheel that we’re trying to do for all the world.
Overall PEP ranks 6th on our list of the best consumer staples stocks to buy. You can visit 10 Best Consumer Staples Stocks To Buy Now to see the other consumer staples stocks that are on hedge funds’ radar. While we acknowledge the potential of PEP as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PEP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
