3 Consumer Stocks We Approach with Caution

Consumer staples stocks are solid insurance policies in frothy markets ripe for corrections. The flip side is that they frequently fall behind growth industries when times are good, and this perception became a reality over the past six months as the sector was down 2.8% while the S&P 500 was up 14.9%.

Investors should tread carefully as the low switching costs for everyday products mean that not all businesses are created equal. With that said, here are three consumer stocks best left ignored.

MGP Ingredients (MGPI)

Market Cap: $548.7 million

Headquartered in Atchison, Kansas, MGP Ingredients (NASDAQ:MGPI) is a leading supplier of high-quality ingredients to the food and beverage industry

Why Should You Sell MGPI?

1. Annual sales declines of 6% for the past three years show its products struggled to connect with the market
2. Projected sales decline of 15.8% over the next 12 months indicates demand will continue deteriorating
3. Overall productivity fell over the last year as its plummeting sales were accompanied by a decline in its operating margin

MGP Ingredients is trading at $26.28 per share, or 9.9x forward P/E. Check out our free in-depth research report to learn more about why MGPI doesn’t pass our bar.

Energizer (ENR)

Market Cap: $1.81 billion

Masterminds behind the viral Energizer Bunny mascot, Energizer (NYSE:ENR) is one of the world's largest manufacturers of batteries.

Why Does ENR Fall Short?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.4%
3. Free cash flow margin dropped by 3.9 percentage points over the last year, implying the company became more capital intensive as competition picked up

At $26.48 per share, Energizer trades at 7.6x forward P/E. Dive into our free research report to see why there are better opportunities than ENR.

Tyson Foods (TSN)

Market Cap: $19.38 billion

Started as a simple trucking business, Tyson Foods (NYSE:TSN) is one of the world’s largest producers of chicken, beef, and pork.

Why Is TSN Risky?

1. Annual sales growth of 1.1% over the last three years lagged behind its consumer staples peers as its large revenue base made it difficult to generate incremental demand
2. Gross margin of 7.4% is below its competitors, leaving less money to invest in areas like marketing and production facilities
3. Earnings per share have dipped by 25.5% annually over the past three years, which is concerning because stock prices follow EPS over the long term

Tyson Foods’s stock price of $54.64 implies a valuation ratio of 14x forward P/E. To fully understand why you should be careful with TSN, check out our full research report (it’s free).

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