Five consumer-focused stocks that have broken or neared their all-time highs may keep on soaring. These stocks are seen rising on strong consumer spending amid forecasts for tepid economic growth, as outlined by The Wall Street Journal. Those set to benefit the most include Coca-Cola Co. (KO), Procter & Gamble Co. (PG), Walmart Inc. (WMT), McDonald’s Corp. (MCD) and Starbucks Corp. (SBUX).
Investors have been buying up shares of traditionally safer stocks in the consumer staples space, signaling a move towards more defensive strategies as some market watchers predict a forthcoming economic downturn.
Investors Buy Up Safer Consumer Stocks
Over the past three months, shares of consumer-staples companies, which make everyday household goods and foods and beverages, have lagged only behind the technology sector out of the top S&P 500 performers. Packaged food giants Procter & Gamble, Nestle (NSRGY) and Unilever NV (UN) are up 26.2%, 31.2% and 9.9% respectively year-to-date (YTD), outpacing the S&P 500’s 20.5% gain over the same period.
Consumer staples stocks and other consumer stocks, such as fast food giant McDonald's and coffee giant Starbucks, are also viewed as high-quality picks that benefit from being defensive plays. Companies with more exposure to discretionary spending, such as automakers, some restaurants and luxury brands, have underperformed.
While these companies don’t typically offer the high-growth of tech companies in sectors like software, or the big dividend payouts like utilities might, they have historically fared well when the economy goes south. According to FaceSet data, the consumer staples sector has a dividend yield of 2.8%, just behind energy and utilities for the third highest yield in the S&P 500. To contrast, the yield on the benchmark 10-year U.S. treasury note closed at 2.06% on Monday.
Investors also like the consumer staples sector as a hideout amid a re-escalation of U.S. China trade tensions. While many of the big players have struggled in recent years to ward off new competition from smaller brands, many investors are pleased with how they have stood up to the challenge.
That said, competitive headwinds persist, with small brands, which comprise less than 2% of the market share, accounting for a whopping 30% of the growth in the consumer products sector from 2014 to 2018, per another Journal report. Consulting firm Bain expects that percentage of growth to grow to 35% by 2025.
On Tuesday, Coca Cola opened at a record high after posting earnings that exceeded the Street’s expectations. Results were fueled by demand for the company’s newest low-sugar drinks, which offset weakness in the U.S. market. The soda maker now expects organic sales growth at 5% for the full year, up from its previous forecast at 4%.
America’s most popular coffee chain also looks like it’s getting its mojo back. While investors sent shares tumbling on fears of new competition and a trend towards more hip and local coffee shops, Starbucks’ stellar quarterly results revived optimism.
Last week, the Seattle-based chain posted its fastest global sales growth in three years, driven by strength in both China and in the U.S., where comparable sales grew 7%. The results prompted analysts at Morgan Stanley to admit “we underestimated you.” Positive tailwinds include an emphasis on customer experience, beverage innovation, and digital engagement, per restaurant analyst Michael Halen, as cited by Bloomberg.
Major consumer staples companies may be an attractive hideout for investors wary about the risks of a forthcoming recession and a trade war with China. With consumer spending at its fastest pace in over a decade and a half in the second quarter, the companies that cater to the everyday buyer are set to benefit disproportionately.
However, risks including competition from newer brands better able to capitalize on rapidly changing consumer trends and shopping habits could end up weighing heavily on the legacy players. Investors may want to see proof of a recovery for some of these companies before diving in head first.