Recession risks are growing, and investors are looking for safety. But not all safe stocks are created equal.
Take consumer staples. Their businesses tend to do better during recessions because people will continue to buy food and other necessities even as they cut back on, well, everything else. That’s one reason that the
SPDR Consumer Staples Select Sector
The exchange-traded fund (ticker: XLP) has fallen just 7.5% so far this year, far better than the
(CPB) 9.7% this year,
Keurig Dr Pepper
(KDP) after rising 0.8% and
(KO) advanced 0.6%,
Spectrum Brands Holdings
(SPB) fell 54%,
(COTY) fell 27%, and
(NWL) has fallen 25%. Some staple stocks are obviously safer than others.
But will they stay that way? A recession may be on the way, but it will probably be a different kind of recession than what happened in 2001 and 2008 because of today’s high inflation.
That means investors should focus on companies with pricing power and avoid those with products that could be substituted for cheaper alternatives or that consumers might turn away from, analysts write RBC Nik Modi. The latter cohort includes
(MO), which have “high exposure to low-income consumers,” and companies that can easily be replaced by private labels, for example
(KMB) – you don’t need to buy Kleenex tissues –
(CLX)—there are alternatives to Glad trash bags—and Campbell Soup.
Instead, Modi suggests focusing on companies that aren’t threatened by private label options, have manageable costs, and aren’t dependent on lower-income shoppers. It also helps if they have “made investments in their business to improve the organizational structure leading to better business trends… and if they are driving pricing/promotional strategies that are appropriate for a period of economic uncertainty,” says Modi. Coca-Cola, Coty, Keurig, and
(STZ) is among the stocks that fit the bill.
Constellation looks particularly attractive. Beer importer Corona isn’t as focused on wine these days, and it never turned to hard-seltzer, as it did
(USA), which fell 35% this year. At 20 times forward 12-month earnings, the stock is not cheap, but it is trading slightly below its five-year average of 21 times. Demand for beer remains strong, too.
Equally important, Modi notes that the constellation learned from the last recession, when it allowed the gap in prices between Corona and its rivals to be too wide, to the detriment of sales, and changed its strategy. In recent years, the company has been raising prices in small, consistent increments. Constellation should be able to maintain the strength of its brands in a way that lasts through a recession.
Let’s see if it works this time.
Write to Ben Levisohn at Ben.Levisohn@barrons.com