When is a good time to invest in consumer staples?
Editorial staff, J.P. Morgan Wealth Management
- Consumer staples are physical goods that you use every day like food, cleaning supplies and personal products. Some staples are connected to a particular brand, like soap or razors, and others are more interchangeable, like coffee or milk.
- Because people are unlikely to quit shaving or drinking coffee, even during times of inflation or economic uncertainty, consumer staples are considered a more reliable investment during volatile times.
- Like all investments, consumer staples have upsides and downsides. Because they are not as volatile as other investments, they also don’t return as much during periods of steady growth.
- Also, not all staples are alike. Some commodities, like tobacco or meat, may be poor long-term investments.
If you’re an investor looking for a more reliable sector to invest in, you might want to consider adding consumer staples to your portfolio. Here’s why.
The consumer staples sector doesn’t react to economic headwinds
Consumer staples are the essential products we use on a daily basis (think: food and beverages, household goods, hygiene products, even alcohol and tobacco). Because these items are considered a necessity, people continue to buy them no matter their financial situation, making the sector very dependable regardless of economic conditions.
“Typically, you would invest in a sector like consumer staples if you think growth is slowing pretty materially. If you think we are going into a recession,” said Abigail Yoder, a J.P. Morgan Private Bank U.S. Equity Strategist.
In other words, the consumer staples sector is considered a defensive sector. Its performance is consistent and resilient, and it does not move much one way or another regardless of what’s going on in the economy. Because of this, investors looking for steady growth and low volatility often turn to consumer staples.
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Specifically, companies in the sector generate consistent revenue because of the ongoing demand for their products. This makes the consumer staples sector a safe haven for investors in times of economic hardship, but it also means the sector underperforms cyclical stocks in times of economic growth. (If you’re looking for a sector with fast-paced returns, you’ve come to the wrong place).
“This type of sector is good for someone who wants visible earnings streams,” Yoder continued. “[The companies] are not going to have surprise earnings because of the commodity-like products they sell.”
What this could mean for you
In time of poor economic outlook, the consumer staples sector is especially attractive. During times like this, experts suggest paring back on cyclicals like energy and financials, keeping growth exposure through reasonably priced sectors like health care and tech, and adding defensives like consumer staples and utilities.
How to choose an investment
As with any sector, things are not all sunshine and rainbows for the consumer staples sector. And just like any other sector, not all consumer staples stocks are created equal – some names will outperform others. It’s important to do your research before investing in the sector, especially if you plan to invest in individual stocks.
Here are some things to consider:
- Look for companies with a strong history of consistent sales. This is an indication that the company is likely to continue generating consistent revenue in times of economic distress.
- Look for companies with high dividend yields. Many of the most successful companies in the space pay dividends to their investors, and because of their consistent earnings, they may be able to continue paying dividends even when economic growth stalls.
- Look for companies with a reasonable valuation. “Companies in the consumer staples sector can be quite expensive on a price-to-equity (P/E) basis,” Yoder said. You’ll want to find names that have an attractive valuation but are still relatively reliable.
For most long-term investors, a good way to invest in the sector is through exchange-traded funds (ETFs) that offer exposure to many stocks in the sector and provide diversification in your portfolio.
What to watch out for
Although the consumer staples sector is known for its long-term returns, there are some associated risks.
- Competition is challenging. Because there are no substitutes for some consumer staples (milk is milk, and there’s not much dairy farmers can do to change the formula), shoppers have a lot of options and often look to purchase the cheapest products. This makes competition challenging for companies, especially in an inflationary environment where commodity prices are rising.
To compete on pricing, companies must cut costs by adjusting their processes and utilizing new technology. They can also try to differentiate themselves by introducing innovative products (like a lactose-free or dairy-free milk).
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Editorial staff, J.P. Morgan Wealth Management
