Every May, the bears declare it's time to "sell in May and go away." That popular adage is based on the historical weakness of certain stocks throughout the summer and their subsequent strength in the winter.
However, investors who ignore that noise usually fare better than those who try to time their summer exits and winter returns. Instead of blindly selling all your stocks, a better strategy would be to buy some defensive stocks if you anticipate a lot of volatility over the next few months.
There are plenty of defensive sectors to choose from, but food stocks often generate stable returns throughout economic downturns. Here are my top three picks in that sector.
1. Beyond Meat
Beyond Meat (NASDAQ:BYND) became the first plant-based meat producer to go public in 2019. Some critics initially dismissed it as a fad stock, but the company's partnerships with big restaurants and retailers convinced more consumers to try out its meatless products.
Its revenue rose 37% to $406.8 million in 2020, even as the pandemic shut down many restaurants that served its products. However, its net loss widened from $12.4 million in 2019 to $52.8 million in 2020, as higher research and development, marketing, and COVID-19 expenses squeezed its margin.
Its revenue grew 11% year over year to $108 million in the first quarter, but it posted a net loss of $27.3 million -- compared to a profit of $1.8 million a year earlier. That slowdown was disappointing, but the company expects its growth to accelerate again this year as its foodservice business recovers.
It expects its revenue to rise 19%-32% year over year in the second quarter, and analysts expect its revenue to grow 41% for the full year. They also expect a narrower loss this year with a return to profitability next year.
Based on those estimates, Beyond Meat trades at about 13 times this year's sales. That price-to-sales ratio might seem high for a food stock, but Beyond Meat is growing more like a disruptive tech stock.
2. General Mills
Investors who think Beyond Meat is too speculative should consider buying General Mills (NYSE:GIS), the packaged foods giant that owns Cheerios, Yoplait, Haagen-Dazs, and Blue Buffalo pet products.
General Mills' organic sales and adjusted earnings rose 4% and 12%, respectively, in fiscal 2020 (ended last May). It benefited from accelerated purchases of packaged foods as shoppers stocked up on products throughout the pandemic. Demand for its Blue Buffalo products also remained stable, since pet food is generally an evergreen market.
General Mills' organic sales rose 8% in the first nine months of fiscal 2021, as robust retail sales offset its weak foodservice sales. Its adjusted earnings grew 13% as it leveraged price hikes, energy-efficient technologies, the optimization of its distribution network, and lower packaging costs to boost its margin.
Analysts expect General Mills' total revenue and earnings to rise 2% and 3%, respectively, this year. It will face tougher comparisons after the pandemic ends, but the stock trades at just 17 times forward earnings and pays a forward dividend yield of 3.2%. That low valuation and high yield should limit its downside potential and make it a good defensive play as rising bond yields spark a rotation from growth to value stocks.
Another well-diversified packaged foods giant is PepsiCo (NASDAQ:PEP), which sells beverages, Frito-Lay snacks, and Quaker products. PepsiCo might initially seem like a risky investment, since soda consumption rates are dropping and many younger consumers are shifting toward healthier foods.
But over the past few decades, PepsiCo has diversified its portfolio beyond sodas with bottled water, fruit juices, teas, sports drinks, and other beverages. Under Indra Nooyi, who led the company from 2006 to 2018, PepsiCo produced healthier versions of its packaged foods.
Those efforts enabled PepsiCo to generate stable growth through multiple economic downturns. In 2020, its organic sales rose 4% as its core constant currency earnings per share (EPS) increased 2%.
In the first quarter of 2021, PepsiCo's organic sales grew 2% as its core constant currency EPS improved 14%. It expects its organic revenue to rise by a mid-single digit for the full year, and for its core constant currency EPS to increase by a high-single digit.
Analysts expect PepsiCo's revenue and earnings to increase 7% and 10%, respectively, for the full year. Its stock remains reasonably valued at 22 times forward earnings and pays a forward yield of nearly 3%. It's also a Dividend Aristocrat that has raised its payout for 48 straight years. Crossing the half-century mark will make it a Dividend King.