The S&P 500 at least temporarily bottomed in October and is up 13.5% from the nadir. In that context, you may be looking for still-undervalued stocks.
One industry to consider is consumer-defensive stocks. Those include food-and-beverage and other packaged-goods companies.
“Consumer-defensive stocks thrived (relatively speaking) in 2022,” according to a Morningstar commentary. “The median stock in the sector trades at a 2% premium to our fair-value estimate coming into 2023.”
But Morningstar analyst Erin Lash sees investment opportunities. The alcoholic-beverage industry traded at a 15% discount to Morningstar fair-value estimates at year-end. And 40% of the consumer-packaged-goods stocks Morningstar covers were substantially undervalued.
Further stock market gains could leave defensive stocks behind, but the bear market may not be over.
Here are Morningstar’s top picks among undervalued consumer defensive stocks, in alphabetical order.
Boston Beer (SAM). Morningstar analyst Jame Katz assigns it a narrow moat (durable competitive advantage) and puts fair value for the stock at $670, 82% above recent trades at $368.50.
“Though much smaller than the brewing behemoths, Boston Beer is well positioned in malt categories, boasting a meaningful growth profile that mainstream beer lacks,” she wrote in a commentary.
“The firm has shown a remarkable proclivity to not only augment its portfolio in alignment with the latest growth vectors,” she said. “But it also captures a disproportionate share of the economic rents generated from this growth by being one of the first movers.
"We’ve seen this exemplified in the company’s participation in the initial rises of craft beer, cider and, more recently, hard seltzer.”
Hain Celestial (HAIN), a food company. Lash gives it no moat and puts fair value for the stock at $36. That's almost twice recent trades at $19.50.
“Cost savings have allowed the firm to increase brand investments to be in line with peers, with returns on these investments improved,” she wrote in a commentary.
“As Hain’s revitalization efforts continue to take hold, we think it will ramp up to 7% annual organic sales growth by fiscal 2025, finally keeping pace with its categories.”
Further, “Hain has the potential to increase its profit margins as it integrates the previously acquired businesses, realizes benefits from a shift to higher-margin products, divests low-margin businesses, and right-sizes overhead expenses after divesting nearly 20% of its sales,” Lash said.
Tyson Foods (TSN), the meat company. Lash assigns it no moat and puts fair value for the stock at $106. It recently traded at $66, 61% below fair value.
“While U.S. consumers are limiting their consumption of red and processed meat (67% of Tyson’s sales), they are consuming more chicken (32% of its sales),” she wrote in a commentary.
“International demand for meat has been strong, and although Tyson’s overseas sales mix is just 15%, it is likely to increase over time, as this is an area of investment.”
Further, “the beef segment has been a bright spot in Tyson's portfolio, as strong international demand has increased the segment's operating margins,” Lash said.
“Conversely, the chicken segment suffered from executional missteps that resulted in structurally higher costs relative to competitors.”
