Consumer staples are considered safe havens in turbulent markets due to their inelastic demand profiles. But recently, the industry has failed to do its job as it shed 13.9% over the past six months. This performance was much worse than the S&P 500’s 1.9% loss.
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’re steering clear of.
Kellanova (K)
Market Cap: $28.62 billion
With Corn Flakes as its first and most iconic product, Kellanova (NYSE: K) is a packaged foods company that is dominant in the cereal and snack categories.
Why Do We Think Twice About K?
- Falling unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
- Projected sales growth of 1.9% for the next 12 months suggests sluggish demand
- Earnings per share have dipped by 3.5% annually over the past three years, which is concerning because stock prices follow EPS over the long term
At $82.50 per share, Kellanova trades at 21x forward P/E. Dive into our free research report to see why there are better opportunities than K.
Olaplex (OLPX)
Market Cap: $845.7 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 Should You Dump OLPX?
- Products aren't resonating with the market as its revenue declined by 14.2% annually over the last three years
- Sales were less profitable over the last three years as its earnings per share fell by 45.3% annually, worse than its revenue declines
- Free cash flow margin dropped by 16.1 percentage points over the last year, implying the company became more capital intensive as competition picked up
Olaplex is trading at $1.28 per share, or 17.1x forward P/E. To fully understand why you should be careful with OLPX, check out our full research report (it’s free).
Keurig Dr Pepper (KDP)
Market Cap: $44.64 billion
Born out of a 2018 merger between Keurig Green Mountain and Dr Pepper Snapple, Keurig Dr Pepper (NASDAQ: KDP) is a consumer staples powerhouse boasting a portfolio of beverages including sodas, coffees, and juices.
Why Does KDP Worry Us?
- Sizable revenue base leads to growth challenges as its 6.5% annual revenue increases over the last three years fell short of other consumer staples companies
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 5.7 percentage points
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Keurig Dr Pepper’s stock price of $32.90 implies a valuation ratio of 15.9x forward P/E. Check out our free in-depth research report to learn more about why KDP doesn’t pass our bar.
High-Quality Stocks for All Market Conditions
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