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Have Institutions Reached the Bottom in Purchasing Consumer Staples?

Consumer staples stocks have experienced a significant decline, with prices dropping double-digits from their recent highs. However, these stocks are now trading at significant support levels, indicating that the bottom may have been reached. Despite facing near-term headwinds and investor sentiment challenges, consumer staples companies continue to grow and have a positive outlook for the coming year. This positive sentiment could be one reason why institutions have been buying these stocks.

During the Q3 earnings cycle, consumer staples companies delivered mixed performance compared to the analysts’ consensus. However, overall, the results were solid. These companies are showing growth, expanding their profit margins, and are expected to continue growing in Q4 and into 2024. With their shares trading near long-term lows, they present attractive technical buying opportunities. Additionally, they offer higher-than-average yields and deep value relative to their historical averages.

Lamb Weston (NYSE: LW), one of the most highly-valued companies in the sector, is currently trading at 15X earnings, while PepsiCo (NASDAQ: PEP), the sector leader, is trading at around 21X earnings compared to its recent range of 25X to 30X. Kraft Heinz (NASDAQ: KHC) and Conagra Brands (NYSE: CAG), which present the best value-to-yield combinations in the sector, are trading at approximately 10X earnings and offer reliable 5% dividend yields.

Conagra Brands: Packaged Foods are on Sale

Conagra Brands shares have experienced a 50% decline from their highs and are currently trading at their lowest levels since the start of the pandemic. While the company’s business has slowed compared to the peak of the pandemic, it remains stable and above 2019 levels, indicating value. Despite being the only company in this group expected to post negative results in Q4, the low analysts’ expectations offset this. Conagra Brands has demonstrated margin power despite sluggish sales, and growth is expected to return next year. Notably, a company director made a large stock purchase in Q4, coinciding with market bottoming action, and institutional activity has shifted in favor of bullish sentiment. Institutions sold these stocks in Q3, contributing to the downward trend, but they have started buying them in early Q4.

Lamb Weston for Robust Growth

Lamb Weston stands out as the strongest performer in terms of earnings and revenue growth, with high-double-digit growth reported in Q3. This strength is expected to continue into Q4 and 2024, including margin expansion. Although it is one of the lower-yielding stocks in the sector, its ultra-low payout ratio and the outlook for sustained dividend growth compensate for the low yield. The key takeaway is that while the yield and payout are currently low, they are likely to increase in the coming years, driving price-multiple expansion. In Q4, a director of Lamb Weston also purchased stock, and institutional activity remained bullish in Q3 and the initial weeks of Q4.

PepsiCo: The Best in Breed

PepsiCo stands out as the best company among consumer staples. Its diversified, global business model supports mid-single-digit growth and offers a solid dividend. The dividend payout, which is currently around 3.15%, continues to grow. PepsiCo pays out 65% of earnings and increases distributions at a mid-single-digit pace that aligns with the earnings per share (EPS) outlook. Institutions have been consistently buying PepsiCo stock for four consecutive quarters. Analysts predict that the stock could rise by about 15% in the near future. While the price action may consolidate at current levels before moving higher, there is evident support above critical levels in line with a long-term uptrend.

General Mills Pricing Power Drives Results

General Mills (NYSE: GIS) had a mixed performance in the third quarter, but both its top and bottom lines outperformed expectations due to the company’s pricing power. Analysts anticipate solid Q4 results and expect the growth to continue in 2024. The stock currently trades at a low price-to-earnings (P/E) ratio of 13X compared to nearly 20X last year, while offering a 3.75% dividend yield and a positive outlook for distribution growth. Analysts rate the stock as a Hold, with a consensus price target roughly 20% above recent lows. Institutions were selling General Mills shares in Q3; however, their activity shifted to buying in Q4.

Kraft Heinz Slowly Builds Value

Kraft Heinz’s Q3 results were mixed relative to the analysts’ consensus but showed growth in both the top and bottom lines. Although analysts have lowered their targets for Q4 and 2024, both consensus sets still expect growth in revenues and profits. This positive news is expected to bring the payout ratio down to about 50% and bring the company closer to resuming distribution increases. While analysts have a minimal expectation for a distribution increase in 2024, it is expected to pick up in 2025. Regardless of when distribution increases resume, they are likely to drive higher share prices. Institutions have consistently been buying Kraft Heinz stock for seven consecutive quarters.

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