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Forget Financials, Buy These Consumer Staples Stocks Instead
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After the EU referendum on the 23rd of June, financial stocks have been getting hammered. The bleeding hasn’t stopped yet, and the Brexit verdict has hit British banks the hardest. Since the 24th of June, Royal Bank of Scotland , Barclays (BCS - Free Report) , and Lloyds Banking Group (LYG - Free Report) lost 37.2%, 37.44%, and 36.26% in share value, respectively.
Banks in the US haven’t performed as badly, but they have also posted steep share price declines after the UK voted to leave the EU. Bank of America (BAC - Free Report) , JP Morgan (JPM - Free Report) , and Morgan Stanley (MS - Free Report) have all seen their share prices drop by over 10% in the time since the vote took place.
Banks are unique because they rely on higher interest rates to make their money. When interest rates are low though, their bottom line becomes threatened.
Banking Profitability is Falling
At times of uncertainty, investors flee towards safer investments, such as treasury bonds. When there is a higher demand for these bonds, bond prices go up and interest rates go down. When the interest rates on treasury bonds are low, the profitability of banks becomes threatened.
That is because the spread between the cost of banks borrowing money and the profits they make off the interest from loans they provide shrinks. People will be dissuaded from holding their money in banks if the interest they earn from deposits shrinks even more, so banks will not lower the interest they pay to depositors. At the same time though, they are making less money off of the interest they earn from loaning out money because the treasury bonds lowered the bar for lending in the market. Because of this profit shrink, many banking stocks stand to get hit quickly, even though Brexit won’t actually take place for at least two years.
A Better Alternative
At such a time, it is best to turn a blind eye to the financial industry and seek better returns in the consumer staples space. Stocks within this sector tend to see less volatility because of the fact that their demand isn’t as affected by financial situations. In other words, folks are not going to part with consumer staples, even if things get pretty bad from an economic perspective.
The market is very uncertain right now, and at times like these, investors gravitate towards investments which have more predictability. It may be wise to buy these stocks now so that you can take profit from an increased preference for consumer staples.
Wal-Mart is the largest low-cost retailer in the world. They engage in the operation of mass merchandising stores. It’s worth noting that the company owns Sam’s Club and also has Wal-Mart stores abroad. WMT is a Zacks Rank #2 (Buy). The company provides investors with a 2.78% dividend. Something which is really great about Wal-Mart is its low beta of just 0.23. The stock has a track record of being a stable source of income for investors. Wal-Mart has a trailing twelve month ROE of 17.58%, and it also gets a score of “A” for Value and Growth in our Style Scores.
Johnson & Johnson has a well diversified portfolio of consumer products which tend to be associated with healthcare. Johnson & Johnson is a Zacks Rank #2 (Buy). JNJ stock has a beta of just 0.58, and it also doles out a 2.77% dividend to shareholders. The company posts an impressive net margin of 21.92%, and it expects to see EPS growth of 6.37% this year. Our current year EPS consensus for JNJ has improved over the last 90 days, going from $6.50 to $6.60.
Altria is the parent company of Philip Morris USA, John Middleton, Ste. Michelle Wine Estates, and U.S. Smokeless Tobacco Company. The company has a diversified line of smoking and non-smoking tobacco products which includes brands such as Malboro, Copenhagen, Skoal, and Black & Mild. MO stock is a Zacks Rank #2 (Buy), and it has a score of “A” for growth in our Style Scores. Altria has a 3.37% dividend, and the company has done well in improving its dividend payout per share every year since 2009. The tobacco giant has a beta of 0.48, and it has a trailing twelve month net margin of 21.17%.
Bottom Line
Consumer staples aren’t as sexy as growth stocks, but they come with their own appeal. Having low betas and providing shareholders with income goes a long way when it comes to staving off volatility. Embracing these stocks now could do you some good with regards to hedging your exposure to broader macroeconomic volatility.
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Forget Financials, Buy These Consumer Staples Stocks Instead
After the EU referendum on the 23rd of June, financial stocks have been getting hammered. The bleeding hasn’t stopped yet, and the Brexit verdict has hit British banks the hardest. Since the 24th of June, Royal Bank of Scotland , Barclays (BCS - Free Report) , and Lloyds Banking Group (LYG - Free Report) lost 37.2%, 37.44%, and 36.26% in share value, respectively.
Banks in the US haven’t performed as badly, but they have also posted steep share price declines after the UK voted to leave the EU. Bank of America (BAC - Free Report) , JP Morgan (JPM - Free Report) , and Morgan Stanley (MS - Free Report) have all seen their share prices drop by over 10% in the time since the vote took place.
Banks are unique because they rely on higher interest rates to make their money. When interest rates are low though, their bottom line becomes threatened.
Banking Profitability is Falling
At times of uncertainty, investors flee towards safer investments, such as treasury bonds. When there is a higher demand for these bonds, bond prices go up and interest rates go down. When the interest rates on treasury bonds are low, the profitability of banks becomes threatened.
That is because the spread between the cost of banks borrowing money and the profits they make off the interest from loans they provide shrinks. People will be dissuaded from holding their money in banks if the interest they earn from deposits shrinks even more, so banks will not lower the interest they pay to depositors. At the same time though, they are making less money off of the interest they earn from loaning out money because the treasury bonds lowered the bar for lending in the market. Because of this profit shrink, many banking stocks stand to get hit quickly, even though Brexit won’t actually take place for at least two years.
A Better Alternative
At such a time, it is best to turn a blind eye to the financial industry and seek better returns in the consumer staples space. Stocks within this sector tend to see less volatility because of the fact that their demand isn’t as affected by financial situations. In other words, folks are not going to part with consumer staples, even if things get pretty bad from an economic perspective.
The market is very uncertain right now, and at times like these, investors gravitate towards investments which have more predictability. It may be wise to buy these stocks now so that you can take profit from an increased preference for consumer staples.
Wal-Mart Stores Inc-(WMT - Free Report)
Wal-Mart is the largest low-cost retailer in the world. They engage in the operation of mass merchandising stores. It’s worth noting that the company owns Sam’s Club and also has Wal-Mart stores abroad. WMT is a Zacks Rank #2 (Buy). The company provides investors with a 2.78% dividend. Something which is really great about Wal-Mart is its low beta of just 0.23. The stock has a track record of being a stable source of income for investors. Wal-Mart has a trailing twelve month ROE of 17.58%, and it also gets a score of “A” for Value and Growth in our Style Scores.
Johnson & Johnson-(JNJ - Free Report)
Johnson & Johnson has a well diversified portfolio of consumer products which tend to be associated with healthcare. Johnson & Johnson is a Zacks Rank #2 (Buy). JNJ stock has a beta of just 0.58, and it also doles out a 2.77% dividend to shareholders. The company posts an impressive net margin of 21.92%, and it expects to see EPS growth of 6.37% this year. Our current year EPS consensus for JNJ has improved over the last 90 days, going from $6.50 to $6.60.
Altria Group-(MO - Free Report)
Altria is the parent company of Philip Morris USA, John Middleton, Ste. Michelle Wine Estates, and U.S. Smokeless Tobacco Company. The company has a diversified line of smoking and non-smoking tobacco products which includes brands such as Malboro, Copenhagen, Skoal, and Black & Mild. MO stock is a Zacks Rank #2 (Buy), and it has a score of “A” for growth in our Style Scores. Altria has a 3.37% dividend, and the company has done well in improving its dividend payout per share every year since 2009. The tobacco giant has a beta of 0.48, and it has a trailing twelve month net margin of 21.17%.
Bottom Line
Consumer staples aren’t as sexy as growth stocks, but they come with their own appeal. Having low betas and providing shareholders with income goes a long way when it comes to staving off volatility. Embracing these stocks now could do you some good with regards to hedging your exposure to broader macroeconomic volatility.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>