Regarded as defensive investments, consumer staples stocks are generally safe bets in choppy markets. The flip side is that they frequently fall behind growth industries when times are good, and this perception became a reality over the past six months as the sector was down 6.8% while the S&P 500 was up 21.3%.
Some companies can buck this trend, but the odds aren’t great for the ones we’re analyzing today. With that said, here are three consumer stocks we’re swiping left on.
Reynolds (REYN)
Market Cap: $5.16 billion
Best known for its aluminum foil, Reynolds (NASDAQ: REYN) is a household products company whose products focus on food storage, cooking, and waste.
Why Do We Avoid REYN?
- Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Capital intensity has ramped up over the last year as its free cash flow margin decreased by 4.5 percentage points
Reynolds is trading at $24.28 per share, or 14.3x forward P/E. Check out our free in-depth research report to learn more about why REYN doesn’t pass our bar.
Mission Produce (AVO)
Market Cap: $826.2 million
Founded in 1983 in California, Mission Produce (NASDAQ: AVO) grows, packages, and distributes avocados.
Why Do We Think AVO Will Underperform?
- Smaller revenue base of $1.43 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Forecasted revenue decline of 7.1% for the upcoming 12 months implies demand will fall off a cliff
- Commoditized products, bad unit economics, and high competition are reflected in its low gross margin of 11.1%
At $11.70 per share, Mission Produce trades at 17.5x forward P/E. Read our free research report to see why you should think twice about including AVO in your portfolio.
Hain Celestial (HAIN)
Market Cap: $100.2 million
Sold in over 75 countries around the world, Hain Celestial (NASDAQ: HAIN) is a natural and organic food company whose products range from snacks to teas to baby food.
Why Are We Out on HAIN?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Hain Celestial’s stock price of $1.13 implies a valuation ratio of 11.5x forward P/E. To fully understand why you should be careful with HAIN, check out our full research report (it’s free for active Edge members).
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