The Importance of Strong Sales in the Consumer Staples Category

Organic sales have always been a crucial metric for investors in the consumer staples category. It indicates that companies are not solely relying on acquisitions or other methods to compensate for declining popularity. However, in today's challenging environment, top-line growth has become even more significant. Consumer staples stocks have stumbled, and inflation may restrict the number of price increases that shoppers can tolerate.

Worries about the impact of weight-loss drugs are also negatively affecting certain food and beverage manufacturers.

The Consumer Staples Select Sector SPDR exchange-traded fund (ticker: XLP) has experienced a nearly 10% decline since the beginning of the year, while the S&P 500 has achieved double-digit gains. The market rally and higher interest rates have diminished the appeal of these traditional dividend-paying consumer stocks. Additionally, their sky-high valuations from last year have further dissuaded some investors.

However, the recent selloff in the industry has helped to improve the attractiveness of these stocks. According to Citi Research's Filippo Falorni, multiples have decreased to levels that can now be considered attractive again. In a recent note, Falorni advises investors to be selective, as the third quarter will reveal whether organic sales growth potential is favorable or not. This will determine the winners and losers in the market.

In simpler terms, as most price increases are already implemented (and arguments arise for packaged product makers to lower their prices), investors will gain a clearer understanding of which brands consumers prefer and are purchasing more frequently. Falorni emphasizes that "the market will not reward earnings per share beats on margins without solid topline trends." In other words, strong earnings alone may no longer be sufficient in this rapidly changing landscape.

Retaining Stock Market Optimism

Stock Market Outlook: Seeking Strong Performers

Analyst Luca Falorni favors companies that demonstrate stronger pricing power, higher exposure to emerging markets, and operate in categories with lower private label penetration. His top picks, from a buy-rated perspective, include:

1. Colgate-Palmolive (CL)
2. Procter & Gamble (PG)
3. Constellation Brands (STZ)
4. Coca-Cola (KO)
5. Monster Beverage (MNST)

Despite Constellation Brands reporting stronger-than-expected earnings last week and raising its forecast, the market reacted by pushing the shares down slightly. This response may reflect the prevailing investor focus on topline growth, a trend expected to shape this earnings season.

Alternatively, PepsiCo (PEP), which reported its results on Tuesday, experienced a positive stock climb. Analysts viewed the company's nearly 9% organic sales growth favorably.

Regarding third-quarter reports, Falorni holds the most optimism for Colgate. He believes that pessimism surrounding pet food presents an opportunity for the company's sales trends to outperform, particularly given its solid presence in emerging markets.

Molson Coors (TAP) and Church & Dwight (CHD) receive neutral ratings from the analyst. However, Falorni still recognizes their potential as winners this quarter. He suggests that Molson Coors could benefit from the recent Bud Light controversy affecting rival AB InBev (BUD), while Church & Dwight showcases better inventory management and pricing.

Overall, it has been a challenging year for staples. Organic sales growth may appear to be a demanding target in a time when consumers are experiencing financial constraints and spending less time snacking at home, as they did during the pandemic. Nevertheless, having a catalyst for stock gains, even if challenging for some players, is still preferable to having no catalyst at all.