3 Consumer Stocks with Warning Signs

Regarded as defensive investments, consumer staples stocks are generally safe bets in choppy markets. 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 8.9% while the S&P 500 was up 15.3%.

Given the low switching costs of basic goods like paper towels, many companies will continue generating poor results while only a handful will shine. On that note, here are three consumer stocks that may face trouble.

Herbalife (HLF)

Market Cap: $939.1 million

With the first products sold out of the trunk of the founder’s car, Herbalife (NYSE:HLF) today offers a portfolio of shakes, supplements, personal care products, and weight management programs to help customers reach their nutritional and fitness goals.

Why Does HLF Fall Short?

1. Declining unit sales over the past two years suggest it might have to lower prices to stimulate growth
2. Anticipated sales growth of 2.8% for the next year implies demand will be shaky
3. Earnings per share decreased by more than its revenue over the last three years, partly because it diluted shareholders

At $9.09 per share, Herbalife trades at 3.8x forward P/E. Check out our free in-depth research report to learn more about why HLF doesn’t pass our bar.

USANA (USNA)

Market Cap: $349.7 million

Going to market with a direct selling model rather than through traditional retailers, USANA Health Sciences (NYSE:USNA) manufactures and sells nutritional, personal care, and skincare products.

Why Does USNA Give Us Pause?

1. Products aren't resonating with the market as its revenue declined by 4.2% annually over the last three years
2. Sales are projected to tank by 1.4% over the next 12 months as its demand continues evaporating
3. Earnings per share decreased by more than its revenue over the last three years, showing each sale was less profitable

USANA is trading at $18.70 per share, or 10.1x forward P/E. To fully understand why you should be careful with USNA, check out our full research report (it’s free for active Edge members).

Keurig Dr Pepper (KDP)

Market Cap: $35.27 billion

Born out of a 2018 merger between Keurig Green Mountain and Dr Pepper Snapple, Keurig Dr Pepper (NASDAQ:KDP) is a consumer staples powerhouse boasting a portfolio of beverages including sodas, coffees, and juices.

Why Are We Wary of KDP?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 5.8% over the last three years was below our standards for the consumer staples sector
2. Efficiency has decreased over the last year as its operating margin fell by 5.9 percentage points
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Keurig Dr Pepper’s stock price of $25.97 implies a valuation ratio of 12.2x forward P/E. Dive into our free research report to see why there are better opportunities than KDP.

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