A defensive strategy with consumer durables
With continued market volatility, investors may be seeking more certainty in their portfolios. While consumer staples stocks tend to be added with defensive investing strategies in mind, this sector has been performing well during the pandemic. “We believe investors should invest in consumer staples for diversification and its defensive characteristics,” says Kurt Spieler, chief investment officer of Wealth Management at First National Bank of Omaha in Omaha, Nebraska. “The sector constitutes 7% of the S&P 500, with many companies able to grow during economic downturns.” As investors look to the rest of the year and into 2021, they should consider reviewing the following companies in this strong sector for their portfolio.
General Mills (ticker: GIS)
Even though 2020 has been a trying year for some businesses, General Mills, the Minneapolis-based producer and manufacturer of packaged foods, has demonstrated strong financial growth. Net sales have been increasing every year since 2017. Sales are up from $15.6 billion in 2017 to about $17.6 billion in 2020, according to the company’s most recent 10-K filing. GIS has been able to increase its annual earnings per share for its shareholders, while reducing its balance sheet in 2019 and in 2020. Furthermore, cash flows have spiked in 2020 to $3.6 billion compared with 2019 cash flow levels of $2.8 billion. In its fiscal 2021 first-quarter results, the company increased its net sales by 9% to $4.4 billion. GIS stock is up more than 11% year to date. General Mills has a strong brand that is marketed well, with a portfolio of famous names like Cheerios, Häagen-Dazs and Yoplait, and it develops new innovative products to adapt to consumer needs.
Walmart has proven to be resilient during the health crisis. As consumer attitudes about online purchases have changed and have shown an increasing preference for grocery shopping online, Walmart has been expanding its e-commerce presence. The mega-retailer has partnered with Shopify (SHOP), used by one million businesses, to build a Walmart Marketplace — giving customers access to more third-party sellers. WMT’s e-commerce grew 74% in the first quarter and increased to 97% in the second quarter of this year, showing that consumers are bent on online grocery shopping. “The pandemic has changed all consumers forever,” says Matt Maley, chief market strategist at Miller Tabak + Co. in Newtown, Massachusetts. Millions of baby boomers never thought they’d buy many products on the internet, but the pandemic has forced them to do just that and they have found it to be an easy and enjoyable process,” he says. The rollout of its new membership Walmart+, an online service that gives customers unlimited free delivery and loads of discounts, will be a game changer, positioning WMT to be a leader in the e-commerce grocery space.
Target Corp. (TGT)
This year has been a great one in terms of financial performance for Target. The retailer has seen growth in comparable digital sales in every quarter, same-day delivery services have skyrocketed and market share gains were seen across all core merchandise categories. “Our data is showing Target executing well with their e-commerce strategy, growing at a pace well in excess of Walmart,” says Kevin Vassily, vice president of market development at Facteus, a financial data provider for investors. “Target is still much smaller than Walmart in e-commerce but growing at a rate in excess of 200% year over year,” he explains. Target’s same-day delivery services, including Order Pick Up, Drive Up and Shipt, saw a 273% increase in sales growth in its second quarter. Target sales through Shipt alone increased more than 350% over last year. There has been accompanied growth in TGT stock, which is up nearly 20% for the year.
Clorox Co. (CLX)
Clorox is a multinational manufacturer of consumer and professional brands, such as Pine-Sol, Hidden Valley and Brita. Clorox disinfecting wipes and Pine-Sol multisurface cleaner both received approval from the U.S. Environmental Protection Agency for claims that these products kill the coronavirus. Consequently, these disinfectants have been in high demand by health-conscious consumers and are out of stock until 2021. “When the broad market was rallying strongly off the March lows, CLX kept up with the market quite nicely into August,” Maley says. “This is very impressive for a staples stock that only fell half as much as the S&P during the decline.” Clorox has paid dividends to its shareholders for 51 consecutive years, and it has been delivering consistent cash flow growth in recent years — namely a 64% increase in annual free cash flow in fiscal year 2020. CLX has rallied about 37% year to date. In the company’s outlook for 2021, Clorox expects flat to low-single-digit sales growth from continued consumer demand.
Costco Wholesale Corp. (COST)
For nearly every month this year, Costco reported increases in net sales compared with reports from the year prior. The retail giant, which operates 785 warehouses worldwide, has experienced consecutive sales growth for the past 10 years and increases in cash flows since 2015. In April 2020, the company increased its quarterly cash dividend from 65 cents to 70 cents per share. COST stock is up about 16% year to date and has continued growth prospects from the company’s global reach and paid membership service. In 2019, COST opened its first store in China and had 139,000 membership sign-ups on opening day alone. “Both Target and Costco are beautifully positioned going forward, but they’re expensive” says Zach Abraham, chief investment officer of Bulwark Capital Management in Tacoma, Washington. “Both are considerably outside their normal valuation range. If you own them, keep them. If not, buy gradually on dips or pullbacks,” he says.
Johnson & Johnson (JNJ)
The broad-based health care company has been innovative in developing high-tech tools that bring solutions for challenges faced by hospitals and pharmacies during the pandemic. JNJ is also among several candidates in the race for the COVID-19 vaccine. It has started phase 3 of its vaccine trials, followed by a rise in its stock price. The company says it’s “committed to bringing an affordable vaccine to the public,” and it “anticipates the first batches of a COVID-19 vaccine to be available in early 2021.” JNJ continues to invest in research and development for growth opportunities in its business. As a leader in pharmaceuticals, medical devices and consumer sectors, JNJ has delivered 36 consecutive years of earnings growth and 57 years of consecutive dividend increases.
Procter & Gamble Co. (PG)
For the fiscal year of 2020, P&G saw a 114% increase in adjusted free cash flow, 6% growth in sales and 13% growth in EPS. As people have been staying home, more purchases have been concentrated in personal and household care products — a real driver for this organic growth. “Clorox and P&G were uniquely positioned to benefit from (the pandemic),” says Abraham. “Investors need to be careful as their recent performance shouldn’t be viewed as a breakthrough. When the global health crisis passes, they should return to more normal levels of revenue and profit,” he explains. “You can own them, just be careful as to how much you pay for shares.”
Seven consumer staples to review for your portfolio:
— General Mills (GIS)
— Walmart (WMT)
— Target Corp. (TGT)
— Clorox Co. (CLX)
— Costco Wholesale Corp. (COST)
— Johnson & Johnson (JNJ)
— Procter & Gamble Co. (PG)
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7 Consumer Staples Stocks to Buy Amid the Pandemic originally appeared on usnews.com