Apart from the recent bout of volatility, it's been a decent year for the broader stock markets. Despite continuously rising interest rates, the risk of recession seems to be on the downtrend, with Goldman Sachs (GS) recently lowering its recession odds once again, this time to 15% from 20%. Indeed, the recession everybody on Wall Street saw coming may fail to land. And that's great news for investors who stayed the course and bought on the dip created by last year's bearish descent.
Just because the recession risks have fallen considerably (it seemed like a 50/50 shot we'd be in a recession for most of last year) does not mean it's time to be complacent and double down on red-hot momentum stocks. If anything, it may be time to lighten up, and perhaps prepare for a potential economic shock that could hit investors when they least expect it.
Recession Risks Fall, But Don't Lighten Up on Consumer Staples Stocks Just Yet
Yes, a 15% chance of a recession is low. However, such forecasts ought to be taken with a fine grain of salt, as it's the black swans that nobody sees coming that tend to have the biggest negative effect on portfolio values. Just look back to the 2020 stock market crash caused by the coronavirus. Few market strategists or pundits saw that disaster coming!
And yes, the consumer staples sector has been relatively sluggish of late. That said, confectionary maker Mondelez (MDLZ) and cereal kingpin (and serial acquirer) General Mills (GIS) both seem to be trading at relatively modest valuations as a result. Should Goldman and other firms decide to hike their recession risk odds again, the price of admission into such boring-but-steady cash cows could go up - perhaps way up.
Without further ado, let's have a look at Mondelez and General Mills to see which stock may be the better long-term value for investors:
Mondelez
Mondelez is the chocolate and biscuit maker behind major brands like Cadbury and Oreo. The stock trades at a bit of a premium to the industry, with a 23.6 times trailing price-to-earnings ratio. Indeed, Mondelez is a steady cash cow, but it also has quite a bit of growth left in the tank as it looks to expand target double-digit sales growth in certain higher-growth regions, like Europe and Latin America.
Despite economic headwinds, demand for Mondelez's sweets is alive and well. Despite inflation-driven price hikes and a potential recession, the stock certainly looks unshakeable at around $71 and change per share.
While Mondelez missed its opportunity to buy Twinkie maker Hostess Brands (TWNK) - a strategic acquisition just made by The J.M. Smucker Company (SJM) - I still think the door is open to future opportunities in the space. For now, the firm seems to be in efficiency mode, similar to the way most other companies are responding to macro headwinds in the first half of the year.
Though Mondelez boasts some of the sweetest brands in the confectionary world, the stock's multiple could stand to contract further as the stock's retreat drags on into year's end. With strong support at around $66 per share, I'd look to be a buyer of any dips toward the level.
For now, though, Mondelez looks fairly valued. The 2.17% dividend yield is a nice bonus, but for value-minded investors, there are likely more compelling opportunities in the consumer staples space right now.
General Mills
General Mills is a consumer-packaged goods maker that looks incredibly cheap following a brutal 27% plunge off its $90.19 peak. At 15.19 times trailing price-to-earnings, and with a 3.37% dividend yield, GIS stands out as one of the more compelling low-cost options to defend against a potential recession.
Recently, the company reaffirmed its full-year forecast, and management noted some relief on the supply chain side following the firm's latest quarter. Still, there's growing concern that many consumers are skipping that middle aisle at the grocery store, or trading down to generic alternatives.
In any case, it seems like changing consumer habits and a falling appetite for recession-resilient stocks are working against shares of GIS. Though growth may be hard to come by from here, I view GIS as a staple for any portfolio that aims to perform well, regardless of how the economy is expected to fare.
Bottom Line
Consumer staple stocks are generally out of favor with investors in what's been a risk-on year for markets. Recession risks may be falling, but the tides could turn again when investors don't expect it. That's why taking advantage of broader weakness in the consumer staples space right now may be a smart move.
Despite the relatively higher price of admission and the lower yield, I prefer Mondelez over General Mills within the space. Confectionaries have held up better than cereals, and I expect this trend to continue in the years ahead.
On the date of publication, Joey Frenette did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
