How Has the Consumer Equity Sector Handled the Pandemic?
And one stock we like.
|Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.|
Erin Lash: The consumer defensive sector continued on an upward trajectory in the fourth quarter, rising at a mid-single-digit clip. However, this performance lagged the market's low double-digit gains. After accounting for the appreciation, we view the consumer defensive space as modestly overvalued at present, trading at a 7% premium to our fair value estimates, which is a significant jump from the 2% discount we ascribed to the sector in September. However, pockets of value remain with particular opportunities in the consumer products and retail defensive arenas.
We'd highlight wide-moat Kellogg (K) as one such opportunity. While the firm has benefited from pandemic-related stock-up trips of consumers for essential items, we think the firm had been laying the groundwork to reignite its top-line trajectory even prior to the pandemic. More specifically, over the last several years, Kellogg has taken steps to move away from direct store distribution in favor of warehouse delivery, divesting of noncore brands and businesses, and upping its investments behind both its manufacturing capabilities and its brands. As such, we think the firm is poised to reemerge from the pandemic in a stronger competitive position.
Heading into the upcoming earnings season, we will be keen to gain insights into the competitive landscape across the consumer products arena. More specifically, since mid-March, the competitive landscape has been quite sublime as consumers and retailers have found favor with leading branded operators that possess the resources and wherewithal to keep shelves stocked to a much greater extent than their smaller peers. In addition, supply/demand imbalances have resulted in promotional spending grounding to a halt. However, we don't expect that these conditions will persist longer term, particularly as concerns surrounding the virus subside once a vaccine is more widely disseminated in mid-2021. As a result, we think those operators that continue to spend behind both their brands and entrenched retail relationships will be best positioned to weather the environment in a post-COVID world.
Erin Lash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.