Diversification gets a lot of lip service in the investing world. And while spreading your wealth across multiple asset classes and industries has been shown to guard against risk, one great stock can be the key to outperforming, and a big winner can make up for plenty of duds. Isolating your best ideas, rather than spreading your resources too thin, can lead to outsized returns. On that note, we asked three of our consumer-goods analysts to pick one stock they would bet on, if they could choose only one.
Brian Feroldi: I think organic grocer Whole Foods Market (NASDAQ: WFM) is a compelling choice now that shares are down more than 42% from their 52-week high. Why the sell-off? Wall Street is worried that increasing competition in the space will cause the company to lose market share, dampening its growth prospects.
So far, those fears seem well founded. Same-store sales declined last quarter by 1.8%, hinting that the company may have lost its mojo. While that's worrying, I think the company has a solid plan to get its comps heading back in the right direction.
First, Whole Foods is lowering prices on many of the items in its store, a move that should make it more competitive. It will crimp margins in the short term, but it should drive sales growth over the long term.
Next, the company is expanding its relationship with Instacart, which will allow Whole Foods to offer home delivery to more customers around the country. Added convenience is sure to resonate with customers.
Finally, the company is taking a page out of Trader Joe's playbook in rolling out a new store concept that it calls 365 by Whole Foods. The stores will occupy a smaller footprint than the normal Whole Foods stores and will offer a more selective product mix at lower prices. The company believes the stores will be a big hit with millennials, who tend to be more price sensitive.
None of these initiatives will turn the company around immediately, but I think each will make it stronger over the long term. In the meantime, Whole Foods is using its huge cash flow to open new stores, buy back stock, and pay a growing dividend. With shares currently trading for about 20 times earnings, Whole Foods has a good chance of being a market beater from here.
Jeremy Bowman: If I could only buy one consumer-goods stock, it would be Amazon.com (NASDAQ:AMZN). In little more than 20 years since its founding, the company has built a network of competitive advantages that is arguably unrivaled in the business world. Amazon Prime has become one of the most popular membership programs in the country, offering a smorgasbord of benefits, including free two-day delivery, access to Amazon Prime Video and the Kindle Lending Library, cloud storage, and others. For just $99 a year, it's a service that no other company can match, and it's a key reason Amazon's sales have grown by 20% or more annually for so many years.
The company has a knack for getting in early in big potential markets. It's done it in e-commerce, e-books, streaming video, and now cloud computing. Amazon Web Services, or AWS, is the No. 1 cloud service in the country, beating old-line tech giants such as IBM and Microsoft, and generated nearly $2 billion in operating profit last year, with sales growth of 70%. Some analysts value AWS alone at $160 billion, and its clear why, based on those results and that growth rate.
Amazon continues to innovate with new services and products, such as Prime Now and Alexa, which will ensure its consistent growth. Its lack of profits will continue to make the stock volatile, but over the long term, its leadership position in high-growth industries will ensure that it outperforms the broader stock market.
Keith Noonan: PepsiCo's (NASDAQ:PEP) historical product strength, focus on innovation, and record of rewarding shareholders make it a top stock to own in the consumer-goods sector. The beverage and food giant has a powerful stable of brands and generates great free cash flow -- approximately $8.1 billion in the past fiscal year -- and a 2.8% dividend yield in the context of 43 years of annual payout increases and substantial buyback initiatives evidences a commitment to shareholder enrichment.
The company's ongoing moves to build away from its soda category are backed by an increase in capital expenditures, research and development, and marketing spending. Amid rising costs, free cash flow is expected to fall to a still-sizable $7 billion in the current year, from which $4 billion will be apportioned for dividend payouts and $3 billion used to buy back stock.
Even as Pepsi faces pressures on soda sales and what CEO Indra Nooyi recently characterized as a "volatile" global economy, the company is demonstrating why it has long been a favored consumer-goods stock, with share repurchases and operational improvements fortifying earnings in a challenging global climate. Using constant currency metrics, the company's recently released first-quarter report posted a 3.5% revenue increase and an 11% earnings increase over the prior-year period, but the strength of the dollar ate into unadjusted performance.
Fiscal 2015 saw PepsiCo achieve $1 billion in productivity savings -- mainly through improvements to supply chain -- and the company is targeting another $1 billion in productivity savings this year and an additional $3 billion savings through 2019.
Successful supply-chain innovations and an emphasis on modernizing product offerings suggest that Pepsi is homed in on the challenges it faces and well equipped to weather market changes -- and the company's brand strength and dividend profile builds a strong case for the stock as one of the best consumer-goods stocks to own.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Brian Feroldi owns shares of Amazon.com and Whole Foods Market. Brian Feroldi has the following options: long January 2017 $195 calls on International Business Machines, short January 2017 $195 puts on International Business Machines, short January 2017 $190 puts on International Business Machines, long January 2018 $175 calls on International Business Machines, and short January 2018 $175 puts on International Business Machines. Jeremy Bowman has no position in any stocks mentioned. Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, PepsiCo, and Whole Foods Market. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.