Have Institutions Reached the Bottom in Purchasing Consumer Staples?

Consumer staples stocks are currently experiencing a downturn, with prices significantly lower than their recent highs. However, there are indications that these stocks may have reached their bottom and present a buying opportunity. Despite short-term challenges affecting businesses and investor sentiment, consumer staples companies are continuing to grow and have a positive outlook for the coming year. This could explain the increased buying activity from institutional investors.

In the third quarter, the earnings performance of consumer staples companies varied, but overall results were solid. These companies are showing growth, expanding profit margins, and are expected to continue growing in the fourth quarter and beyond. With shares trading at long-term lows, they offer attractive technical buying points, above-average yield, and deep value compared to their historical norms.

For example, Lamb Weston (NYSE: LW), one of the top-valued companies in the sector, has seen its stock fall to a price-to-earnings ratio of 15X. PepsiCo (NASDAQ: PEP), the sector leader, is trading at about 21X earnings, compared to a recent range of 25X to 30X. Kraft Heinz (NASDAQ: KHC) and Conagra Brands (NYSE: CAG), which offer the best value-to-yield combinations in the sector, are trading near 10X earnings and have a reliable 5% dividend yield.

Conagra Brands: Packaged Foods are on Sale

Conagra Brands shares have fallen 50% from their highs and are currently trading at the cheapest levels since the start of the pandemic. While the business has slowed compared to its peak during the pandemic, it remains stable at levels higher than those seen in 2019, indicating potential value. Analysts have set a low bar for the company’s performance in the fourth quarter, but its strong margin performance, despite sluggish sales, suggests a return to growth in the near future. Notably, a company director made a large purchase in the fourth quarter, coinciding with the market’s bottoming action, and institutional activity has shifted in favor of buying.

Lamb Weston for Robust Growth

Lamb Weston is leading the pack in terms of earnings and revenue growth, with high-double-digit growth reported in the third quarter. This strength is expected to continue into the fourth quarter and 2024, with additional margin expansion. Although this stock has a lower yield compared to others in the sector, its ultra-low payout ratio and outlook for sustained dividend growth make up for it. A director of the company also bought stock in the fourth quarter, and institutional activity has been net-bullish since the third quarter.

PepsiCo: The Best in Breed

PepsiCo stands out as the top performer among consumer staples companies. Its diversified, global business model allows for sustained mid-single-digit growth and offers a solid dividend. The dividend yield is currently around 3.15% for this Dividend King and is still growing. Institutions have consistently increased their holdings of PepsiCo stock for four consecutive quarters, and analysts predict a potential price increase of about 15%. While the price action may consolidate at current levels before moving higher, support levels indicate a long-term uptrend.

General Mills Pricing Power Drives Results

General Mills (NYSE: GIS) had a mixed performance in the third quarter, but its top and bottom lines outperformed expectations due to the company’s strong pricing power. Analysts expect solid results in the fourth quarter and continued growth in 2024. The stock is currently trading at a low 13X earnings, compared to nearly 20X last year, and offers a dividend yield of 3.75% with a positive outlook for distribution growth. Analysts rate the stock as a Hold with a consensus target price of approximately 20% above its recent lows. Institutional activity shifted from selling in the third quarter to buying in the fourth quarter.

Kraft Heinz Slowly Builds Value

Kraft Heinz’s performance in the third quarter varied compared to analysts’ consensus, but it showed growth in both the top and bottom lines. Although analysts have lowered their targets for the fourth quarter and 2024, both consensus sets predict further growth. This is positive news as it will help decrease the payout ratio and bring the company closer to resuming distribution increases. Institutions have consistently increased their holdings of Kraft Heinz stock for seven consecutive quarters.

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