The Nasdaq Composite‘s (NASDAQINDEX: ^IXIC) drop into correction territory got investors worried. The S&P 500‘s (SNPINDEX: ^GSPC) fall to correction levels this week seems to have confirmed their concerns. Under such conditions, what is an investor to do?
Many will move money into sectors they view to be less risky, such as consumer staples. However, while there are good reasons to see consumer staples companies as defensive picks, not all such stocks are worth buying. Here are three you should probably avoid now, including one with a tempting 10% dividend yield.
Consumer staples makers sell things people buy regularly because they are, almost by definition, necessities. In most cases, these products are also fairly cheap relative to their benefits. You may put off buying a new car when the economy gets rough, but you probably won’t cut back too far on food, beverages, or toiletries.
XLP data by YCharts.
As the chart above shows, over the past month, the average consumer staples stock has fallen far less than the S&P 500 index or the Nasdaq Composite. No stock is entirely safe from declines, but a minor dip certainly feels better than losing 10% or more of the value of your portfolio in a market correction. And underneath that average are individual companies, some of which naturally performed better than average. PepsiCo(NASDAQ: PEP), for example, is up 2.6% over the past month, in contrast to the average consumer staples stock, which is down 2.6%. That’s a more than 5 percentage point outperformance.
XLP data by YCharts.
PepsiCo’s gains were probably tied to the fact that it has been out of favor and had some ground to make up relative to its consumer staples peers. But it is still performing reasonably well as a business. In 2024, the company’s organic sales rose 2% and its adjusted earnings jumped 9%. That’s not as good as the results from just a few years ago, when inflation allowed the company to push large price hikes onto its customers, but it is hardly an indication that PepsiCo has suddenly lost its way.
If you are looking for safe haven stock investments now, PepsiCo, with its historically high 3.6% dividend yield, is probably worth considering. But food makers Kraft Heinz(NASDAQ: KHC), Conagra Foods(NYSE: CAG), and B&G Foods(NYSE: BGS) are three you might want to avoid.
The story behind Kraft Heinz is fairly simple. It is attempting to refocus its business around its most important brands. But its sales in its “accelerate” segment (which features its best known and most important brands) decelerated at an increasing rate as 2024 progressed. In the first quarter, organic sales for those brands rose 0.5%. Then it was all downhill, with drops of 2.4% in the second quarter, 4.5% in the third, and 5.2% in the fourth. Kraft Heinz is clearly struggling. As such, it’s not a safe place to hide from market turbulence even though the dividend yield is 5.3% and the stock has been on the rise.
KHC data by YCharts.
Conagra’s story is similar, but there’s a nuance. In the second quarter of its fiscal 2025, the company’s organic sales rose 0.3%. However, its adjusted earnings fell 1.3%, partly thanks to restructuring costs and write-downs of certain brands. That last part is the key to the story because Conagra’s portfolio is basically filled with second-tier food brands. Given its middling-at-best performance, why would you want to invest in second-tier brands when you could buy companies with industry-leading brands? Sure, Conagra’s dividend yields 5.4% at the current share price, and that share price has been moving higher, but there are better-positioned consumer staples companies that would likely provide investors with more safety.
BGS Debt to Equity Ratio data by YCharts.
The big story for investors when it comes to B&G Foods is its huge 10%-plus dividend yield. That alone is about the same as the total annualized returns investors have come to expect from the broader market over time. But don’t get suckered in. Even if management holds the dividend payout steady (and it cut it by more than 50% in 2022), B&G Foods’ entire business model is risky. The company has long focused on buying unloved and neglected brands, then investing in them to turn them around. That’s not a bad strategy, and it has had some notable successes. But its acquisition-driven business model has led to a heavy debt load that the company is having trouble carrying. Sure, the yield is high, but B&G Foods is not a safe haven investment.
The problem right now is that scared traders appear to be acting rashly, buying high-yield consumer staples stocks without paying close enough attention to the underlying businesses. That’s not a great plan. There are well-run companies to be found out there — companies like PepsiCo — with industry-leading businesses, that offer value, yield, and relative safety amid this market correction.
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Reuben Gregg Brewer has positions in PepsiCo. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
Why You Should Stay Away From These 3 Stocks Even as They Rally During the Market’s Swoon was originally published by The Motley Fool
