Top Consumer Staples

It’s a Recession. What stocks should we look for?

Investing during a bear market is challenging. Fear and uncertainty moves the markets lower, and the risk to investors continues to increase.

Market volatility limits where investors are able to invest to avoid losing money.

With the appropriate investments, preparation, and strategy, you will be able to protect your portfolio.

Why do I like consumer staples?

The demand for essentials like food and beverages makes consumer staples safer investments during high volatility.

A number of Consumer Staples stocks are overvalued and stand to benefit from a bear market or recession. Their fundamentals, attractive valuations, and earnings are driving catalysts in outperforming inflationary levels.

The Nasdaq has reached bear market territory. It’s down 22.9% from its 16,057 November 19 peak. The Dow Jones is down nearly 10% YTD. And the S&P 500 has dropped more than 13% YTD, with its shortest and most recent bear market occurring during the pandemic from February 19, 2020, through March 23, 2020.

Low-interest rates acted like steroids for stocks throughout the pandemic, and rising interest rates amid high inflation are prompting a significant slowdown across key variables, including an unexpected 1.5% GDP contraction, a continued battle with high inflation, and sticky variables like housing affordability and wages.

It’s clear to me that the Fed waited too long to tighten monetary policy.

We are experiencing a potential bear market rally, investors must be cautious that they do not invest prematurely.

Consumer Staples – Advantages

Consumer staples companies may not have the highest earnings growth or year-over-year revenue growth because these stocks tend to be large, mature companies. Historically, the sector has experienced relatively little disruption. But these stocks make up for modest growth with low price volatility, reliable profits, dividends, and defensive positioning.

Consumer staples stocks function in a non-cyclical manner, meaning they offer investors safety during recessionary climates. Since these companies sell goods such as food and cleaning products that consumers rely on regardless of the state of the economy, they tend to generate solid profits even in weak economies. For instance, a number of consumer staples companies thrived during the early stages of the COVID-19 pandemic as consumers stocked up on essentials and avoided spending on discretionary purchases such as travel and restaurant meals.

Some consumer staples stocks are Dividend Aristocrats, which are companies that have increased their dividend payouts every year for at least 25 consecutive years. For this reason, consumer staples stocks are often popular with retirees and other investors seeking long-term income and security. 

Because consumer staples companies operate in stable sectors and sell products that are always in demand, the biggest ones have been around for a century or more. Their longevity is a reflection of their brand value, a history of acquiring smaller brands, and their ability to endure a wide range of challenges and economic cycles.

When do you invest during a Recession?

Bear markets tend to exhibit several months of downward pressure on equity markets that are offset by rising bond markets. However, bonds continue to sell off in conjunction with equities due to rising rates and the uncertainty of monetary policy. As a result, we are seeing credit spreads and risks associated with corporate bonds.

As rates have increased, so has credit risk. Dumping stocks may limit downside losses, but it may also prevent potential gains.

The S&P 500 has bounced back from every prior bear markets to rise to all-time highs . The decade following the 2000 dot-com bubble bursting was a rough stretch. However, stocks have often been able to regain their highs within a few years. Inflation is so high that if you sit on cash, you’re intentionally losing to inflation and then losing to potential upside.

Having no exposure to equities typically is a recipe for disaster. Focusing on quality stocks goes beyond value. The traditional relationship on returns with volatility spiking and yields falling is that investors find safe havens in bonds – we are not seeing this.

I recommend doing the following:

Focus on companies wit strong balance sheets and low debt levels, strong free cash flow, and overall fundamentals.

Some Recession-Proof ideas for you.

Staples have a strong likelihood of success of pushing increasing costs to consumers without a significant drop-off in sales. YTD, the Consumer Staples (XLP) sector is down only 3.42%. Staples include food and beverages, personal hygiene, and cleaning products.

Staples are different from Consumer Discretionary. The Consumer Discretionary Sector (XLY) has experienced a 26% decline YTD.

1. Adecoagro S.A. (AGRO)
2. Cal-Maine Foods, Inc., (CALM)
3. Pilgrim’s Pride Corporation (PPC)
4. Darling Ingredients (DAR)
5. Sanderson Farms (SAFM)
6. Alico Inc. (ALCO)
7. Carrefour SA (CRRFY)