Consumer staples stocks typically hold up better during economic downturns and market routs, but we didn’t see that last week during the coronavirus-driven selloff. While the
tumbled 11.5%, the
Consumer Staples Select Sector
SPDR ETF (ticker: XLP) only did slightly better, with a 10.3% loss.
analyst John Baumgartner says the sector has the potential to weather the impact of the coronavirus better than the overall market going forward, since it has less exposure to the international supply chain. Certain food stocks could even see short-term benefits from increased grocery spending and declining commodity prices, Baumgartner wrote in a Tuesday note.
The analyst says today’s economic environment is, in some ways, similar to the 2008-09 financial crisis, given the broad decline in global demand—this time due to widespread quarantines and travel restrictions.
China’s latest data illustrates those parallels, and what could happen next in the U.S. if the virus continues to spread here. The country’s official manufacturing purchasing managers index fell to an all-time low of 35.7 in February, sharply down from January’s reading of 50.0. The index’s previous low of 38.8 came in November 2008, at the start of the global financial crisis.
The country’s services sector was hit even harder, with the nonmanufacturing gauge dropping to a record low of 29.6 in February, from 54.1 in the previous month. Even during the 2008 financial crisis, the services sector was able to stay above 50.
Consumers’ spending behaviors should also see some parallels to the financial crisis, Baumgartner wrote.
During the 2008-09 financial crisis, U.S. consumers’ spending on food at home outperformed restaurant spending. Frozen foods like pizza and potato products saw a spike in volume and prices, as well as refrigerated foods such as bacon, meat, cheese, and yogurt. For shelf-stable foods, cooking ingredients—such as sauces, baking mixes, and pasta—also sold more as consumers chose to cook at home instead of eating out. At the same time, nonessentials such juices and desserts saw sales slide. This time around, Baumgartner expects canned foods to perform better as consumers remain isolated amid coronavirus fears and need foods that can last longer.
Global demand deceleration during the 2008-09 financial crisis also caused a sharp decline in prices for commodities such as corn and soybeans, while wheat prices jumped from a shift to less expensive ingredients. Those lower commodity prices drove gross margin expansion for packaged food companies, and that should occur this time around as well. Even before the coronavirus hit, grain demand had already weakened last year as a result of China’s African swine fever outbreak that has killed millions of hogs in the country.
While food stocks in general are likely to see some tailwinds from coronavirus fears, Baumgartner recommends investors to watch for companies with specific positive drivers, such as organic revenue growth, potentially transformative mergers and acquisitions, or mispriced opportunities. Wells Fargo’s stock picks include
Simply Good Foods
Write to Evie Liu at [email protected]
Source: Thanks https://www.barrons.com/articles/food-stocks-will-benefit-as-coronavirus-fears-keep-people-at-home-51583265875