Regarded as defensive investments, consumer staples stocks are generally safe bets in choppy markets. 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 2%, disappointing since the S&P 500 climbed 5%.
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 best left ignored.
Central Garden & Pet (CENT)
Market Cap: $2.06 billion
Enhancing the lives of both pets and homeowners, Central Garden & Pet (NASDAQ:CENT) is a leading producer and distributor of essential products for pet care, lawn and garden maintenance, and pest control.
Why Do We Think CENT Will Underperform?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- ROIC of 9.1% reflects management’s challenges in identifying attractive investment opportunities, and its falling returns suggest its earlier profit pools are drying up
Central Garden & Pet is trading at $35.52 per share, or 13.1x forward P/E. Read our free research report to see why you should think twice about including CENT in your portfolio.
General Mills (GIS)
Market Cap: $26.39 billion
Best known for its portfolio of powerhouse breakfast cereal brands, General Mills (NYSE:GIS) is a packaged foods company that has also made a mark in cereals, baking products, and snacks.
Why Are We Cautious About GIS?
- Declining unit sales over the past two years suggest it might have to lower prices to stimulate growth
- Projected sales decline of 4.2% for the next 12 months points to an even tougher demand environment ahead
- Earnings growth over the last three years fell short of the peer group average as its EPS only increased by 2.2% annually
General Mills’s stock price of $49.38 implies a valuation ratio of 12.6x forward P/E. If you’re considering GIS for your portfolio, see our FREE research report to learn more.
Olaplex (OLPX)
Market Cap: $940.6 million
Rising to fame on TikTok because of its “bond building" hair products, Olaplex (NASDAQ:OLPX) offers products and treatments that repair the damage caused by traditional heat and chemical-based styling goods.
Why Are We Wary of OLPX?
- Annual sales declines of 16.4% for the past three years show its products struggled to connect with the market
- Sales were less profitable over the last three years as its earnings per share fell by 49.6% annually, worse than its revenue declines
- Free cash flow margin dropped by 13.2 percentage points over the last year, implying the company became more capital intensive as competition picked up
At $1.41 per share, Olaplex trades at 18.2x forward P/E. To fully understand why you should be careful with OLPX, check out our full research report (it’s free).
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