Last month’s consumer staples plunge was quite vicious, with some of the top brand names in the space — such as KO, MDLZ, and WOOF — seeing their shares take a big hit. Undoubtedly, consumer staple stocks are renowned for their stability through turbulent economic conditions. With their solid dividends and track records of outperforming in recession-hit down markets, you’d think these stocks would be surging, not nosediving off a cliff.
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Indeed, higher interest rates are mostly to blame for the recent slip in the sector. The iShares U.S. Consumer Staples ETF (NYSEARCA:IYK) fell more than 7% last month and is now down around 15% from its all-time high from last year. So much for stability!
As recession fears increase, I think fallen consumer staple stocks are looking like smart Buys. Just ask the many analysts covering the names. Therefore, in this piece, we’ll check out TipRanks’ comparison tool to weigh in on three respected consumer staple stocks that boast “Strong Buy” ratings, even after the sector’s recent sell-off.
Coca-Cola (NYSE:KO)
Coca-Cola is a timeless classic for any long-term value investor’s portfolio. It’s not only a strong consumer staple with a legendary brand (and a wide “moat” filled with sharks) that has Warren Buffett‘s gold stamp of approval, but it’s also a company that seldom falls into a bear market. When it does, it doesn’t tend to stay in one for too long a duration. At writing, the stock is down around 20% from its all-time high hit last year.
Most of the recent slump started in September, thanks in part to interest rates that only seem to want to climb higher. Of course, Coca-Cola’s dividend, which now yields 3.44%, needs to adjust upward to be more competitive with risk-free Treasury notes.
However, other near-term headwinds have also taken a bit of fizz out of the stock. Most notably, the non-stop chatter about Ozempic and other weight-loss drugs has been hogging business headlines of late. As more Americans go on Ozempic, the fear is that there will be less of an appetite for food, most notably unhealthy junk food and sugary sodas.
Just because people may eat less while on such drugs doesn’t mean Ozempic and its alternative are a moat eroder for snackfood firms. In its multi-decade history, Coca-Cola hasn’t really seen much of anything erode its moat.
Though the advent of weight-loss drugs is notable, fad diets and other weight-loss medications are really nothing new. They haven’t been able to hurt Coke’s moat. And once the overblown Ozempic hype blows over, I think investors will realize the recent slip in shares stands out as more of a great buying opportunity than a reason to reconsider the stock’s moat width. As such, I am bullish on KO.
The way I see it, Coke’s moat is alive and well, and analysts are still pounding the table as the firm looks to sail through a potential recession in a somewhat smoother fashion relative to the market.
What is the Price Target of KO Stock?
KO stock is a Strong Buy on TipRanks, with nine Buys and three Holds. The average KO stock price target of $70.00 implies upside potential of 29.5% from here.
Mondelez (NASDAQ:MDLZ)
Mondelez is a confectionary firm that’s also singing the Ozempic blues, with shares down 11% over the past month. Indeed, it’s not the type of vicious downside move you’d come to expect from such a steady cash cow of a consumer staple. Like KO, I believe the weight-loss worries have created nothing more than a long-term buying opportunity for investors seeking to batten down the hatches for a recession. For now, I’m staying bullish on MDLZ.
The stock yields 2.48%, which is relatively unenticing compared to Treasury notes, with the 10-year Note offering a rate that’s closing in on 5%. Still, Mondelez strikes me as a snack food firm with relatively decent growth prospects as it looks to expand at home and overseas.
Of course, someone on a diet (or with a curbed appetite) may be better able to resist those Oreo cravings. Still, 10 years from now, many of us will be snacking on Mondelez foods, possibly forgetting about the weight-loss craze that’s taken the snack food market by storm.
TD Cowen sees Mondelez as one of its top picks, noting the strong growth prospects in the developing markets. I think they’re right on the money. The stock trades at 20.4 times trailing price-to-earnings (P/E), less than its five-year historical average of 21.8 times. What’s changed with the firm’s growth profile since the stock commanded a multiple closer to 30 times trailing P/E? Not a heck of a lot.
What is the Price Target of MDLZ Stock?
Mondelez is a Strong Buy, according to analysts, with 15 Buys and two Holds assigned in the past three months. The average MDLZ stock price target of $82.82 entails 30.5% upside potential from here.
Petco Health and Wellness Company (NASDAQ:WOOF)
Petco is technically a consumer discretionary, but the firm may define itself as a wellness company. Personally, I think it’s more of a consumer staple company. Many pet owners are still more than willing to do everything they can to keep their pets happy. They are a part of the family, after all. In any case, as consumer headwinds weigh, it’s not hard to imagine many pet owners are more than willing to trade down at the local Petco. Regardless, I’m staying bullish on the stock.
Can pets really tell the difference between pricy pet food and the cheap, generic alternatives? We’ll never really know. Regardless, a pressured consumer could continue to trade down to lower-cost items. But fortunately, Petco still stands to benefit as a grocery store tailored for the furry member of the family.
Currently, WOOF is in a vicious multi-year downcycle, with the stock at $3 and change, down from the $31.08 per share peak it hit back in 2021. As the company continues teaming up with various retailers in the U.S. (and Canadian Tire (TSE:CTC.A) in the Canadian market), I’d not count this underdog (forgive the pun) out of the race just yet — not while it’s trading at 0.4 times price-to-book!
What is the Price Target of WOOF Stock?
Petco sits at a Strong Buy, with six Buys and two Holds assigned in the past three months. The average WOOF stock price target of $7.14 entails a whopping 97.2% upside potential.
The Bottom Line
The consumer staples stock plunge seems overdone now, especially as recession talks return. At the end of the day, the sector seems rich with value and upside. At this juncture, analysts expect the most upside from WOOF stock. If they’re correct, the stock could almost double from current levels.
