Wall Street tends to cycle through stock themes even though some sectors tend to be filled with strong businesses. And even strong businesses go through hard times.
Right now, investors are downbeat on consumer staples stocks, and PepsiCo (PEP 1.70%), Clorox (CLX +3.24%), The Hershey Company (HSY +2.01%), Hormel Foods (HRL 1.34%), and General Mills (GIS 1.52%) are all muddling through rough patches. History suggests you'll end up a winner if you can hold these well-run consumer staples businesses for at least five years.
What's wrong with consumer staples stocks?
From a big-picture perspective, there's really nothing wrong with consumer staples stocks. They continue to sell relatively inexpensive items that are used and bought regularly regardless of the economy. If you are a long-term investor, this is a great sector to look at. That's particularly true today because Wall Street is downbeat on these stocks.
Over the past year, the consumer staples sector has gone nowhere, while the S&P 500 index is up over 15%. One of the big issues is the new administration in Washington, D.C's decision to push health-conscious themes. And, at the same time, consumer tastes have been shifting, leading to a disconnect between some consumer staples stocks and their end customers.
It's OK; things like this happen from time to time. Well-run consumer staples makers adjust, bringing out new products, buying new brands, and selling off the brands that no longer fit well in their portfolios.
The renewal process can take some time, but it usually works out eventually. Which is why five years is probably a good holding period if you buy into consumer staples makers, like packaged-food producers.
Image source: Getty Images.
5 consumer staples makers to consider buying today
If you are willing to jump into the water and stick around for five years, you should consider PepsiCo, Clorox, Hershey, Hormel, and General Mills. Here's why.
NASDAQ: PEP
Key Data Points
PepsiCo is a Dividend King with an industry leading portfolio of brands in beverages (Pepsi), salty snacks (Frito-Lay), and packaged foods (Quaker Oats). The stock has a historically high yield of around 4% today.
It isn't performing as well as its peers right now, so investors are shunning it. But it stands toe to toe as a business with its closest rivals and is already taking steps to rejigger its portfolio, buying a probiotic beverage maker and a Mexican-American food company. You can collect the lofty yield while you wait for PepsiCo to get back on track, like it has many times before.
NYSE: CLX
Key Data Points
Clorox has increased its dividend for 48 consecutive years. It operates across a number of different consumer staples categories, including its namesake cleaning supplies and food (Hidden Valley).
The real problem here is that a demand spike during the pandemic, the post-COVID spike in inflation, and a data breach -- one right after the other -- have left Clorox's margins below their historical norms. The company is working on the issue and has already seen an improvement of roughly 10 percentage points over the past three years. But management still has more work to do, and investors remain sour on the shares, leading to a historically attractive yield of 4% or so.
NYSE: HSY
Key Data Points
Hershey's yield is a bit lower than the other stocks here, coming in at 2.9%. That, however, is very high for the company. The dividend has been increased annually for 15 years but has generally trended higher for decades.
The big problem with Hershey today is on the cost side of the equation, with the price of cocoa rising dramatically in recent years. Cocoa comes from trees, so the normal reversion to the mean that commodity prices go through is going to be a drawn-out process.
If you can think in the long term, however, now would be the time to buy this industry leading confectioner. When cocoa prices come back down, Wall Street will likely have already priced in that benefit.
NYSE: HRL
Key Data Points
Hormel Foods is another Dividend King. Its focus is on protein, which would seem to be on-target right now given the negative side effects for muscles with GLP-1 drugs.
But Hormel's collection of brands, while generally leaders in their categories, haven't been hitting it off well with consumers. The company has been having a hard time pushing through price increases. It has also faced a slow recovery in China, a key foreign market.
Then there's been the ongoing issue of avian flu. And, while getting better, the company's acquisition of Planters didn't go as smoothly as investors would have liked.
None of these problems alone is insurmountable, but taken together, they are kind of overwhelming. You don't become a Dividend King by accident, however, and the stock's historically high 4.1% yield is probably worth looking at if you can stand sticking around for five years.
NYSE: GIS
Key Data Points
Last up is General Mills, another food maker with a historically high yield: roughly 5%. The dividend has been increased annually for six years, but it has trended generally higher for decades.
The business is working through a period of declining sales. That's not great, but, as already noted, even good companies go through rough patches. The question is what do they do about it.
In the case of General Mills, the answer is reworking its brand and product portfolio. That's the playbook that it has used many times before to get its business growing again. There's no reason to believe it won't work again this time if you are willing to buy it and wait a few years.
Wall Street thinks about tomorrow, not five years from now
One of the most difficult things to see on Wall Street is how investors focus so much attention on the short term. If you can shift your gaze and look toward the horizon, even if that's just five years, a whole world of investment opportunities will open up to you. Phrases like "Trees don't grow to the sky," "Nothing goes up in a straight line," and "reversion to the mean" are all applicable here as investors flock like lemmings into the hottest investments.
Meanwhile, good businesses that are facing temporary headwinds go unloved on Wall Street all the time. If you buy and hold, you can end up with some winning investments. And right now, out-of-favor PepsiCo, Clorox, Hershey, Hormel, and General Mills should all be on your radar.
