The latest inflation report in November brought some positive news for hungry shoppers but was less favorable for stocks in the staples industry. The U.S. Bureau of Labor and Statistics data shows that the consumer price index for food at home experienced its 15th consecutive month of slow growth. Compared to the previous year, the index only increased by 1.7% on an unadjusted basis and remained relatively flat compared to October.
This consistent deceleration in monthly inflation readings has prompted Wells Fargo analyst Edward Kelly to issue a warning about potential deflation. While many staples retailers have anticipated slight price increases for the upcoming year, the weakened pricing environment, consumer strain, likely rise in promotions, and continued cost pressure may hinder any significant changes.
Kelly suggests that investors should be cautious when it comes to grocery and staple sellers’ stocks since lower food prices can lead to overall decreased sales figures for these retailers. He only maintains an ‘Overweight’ rating for Walmart, Target, BJ’s Wholesale Club, and Dollar Tree.
Among these stocks, only Walmart has seen positive growth year to date, primarily due to concerns about deflation and other challenges faced by retailers specializing in essential goods.
Unfortunately, things do not seem optimistic for consumer staples companies producing these products, as they have also experienced their fair share of losses this year.
Goldman Sachs Analyst Warns of Challenges for Staples Investors in 2024
Goldman Sachs’ analyst, Bonnie Herzog, has issued a warning to staples investors regarding potential challenges in the coming year. Despite a 4% decrease in the Consumer Staples Select Sector SPDR Fund in 2023, Herzog believes that stock valuations are not attractive, and the ability to raise prices is diminishing while volumes remain weak.
While Herzog does acknowledge that sustained gross margin tailwinds will provide some cushion for the bottom line, she still anticipates a tough road ahead for many stocks under their coverage.
However, Herzog suggests that investors should not completely abandon the sector but instead be selective in their choices. In particular, food makers deserve more scrutiny, as supported by the November Consumer Price Index (CPI) data. According to Herzog, consensus expectations for volumes and revenue may still be too optimistic, leading to further disappointment. As a result, she maintains a Sell rating on General Mills, Campbell Soup Company, and J.M. Smucker.
Despite these challenges, not all is doom and gloom in Herzog’s view of the future. She believes that concerns about snacks in the midst of an obesity-drug boom have been exaggerated. Her top choices include Kellanova (formerly Kellogg), PepsiCo, and Mondelez International. Additionally, she expects Mondelez International to benefit from higher growth in its emerging market businesses.
As the difficult year of 2023 comes to a close, staples investors may be hoping for a more promising outlook in the new year. However, it appears that the challenges might persist a little longer.