Given the stock market’s volatility and the economy’s sluggishness, you might want to consider defensive stocks.
These stocks, in sectors such as consumer staples and utilities, tend to outperform the overall market when it’s falling and the economy is struggling. That’s because demand remains strong in these areas even during economic downturns.
The S&P 500 has dropped 19% this year, and the economy contracted 1.6% in the first quarter and 0.6% in the second quarter.
Looking at consumer defensive stocks, on Oct. 24, Morningstar cited two of them that have strong fundamentals. Its analysts also think the duo are greatly undervalued at a time when most consumer-defensive stocks are less undervalued than stocks in other sectors.
Morningstar chose Boston Beer (SAM) and Hain Celestial Group (HAIN).
Boston Beer is a leader in U.S. high-end malt beverages, including craft beer, hard cider, and hard seltzer. Among its well-known brands are Samuel Adams, Angry Orchard, Twisted Tea, and Truly Hard Seltzer.
Hain Celestial makes natural food and personal-care products. Its brands include Celestial Seasonings, Terra, and Earth's Best baby food.
Morningstar’s Take on Boston Beer
Morningstar analyst Jaime Katz assigns the company a narrow moat and puts fair value for the stock at $670. It recently traded at $413.
“Though much smaller than the brewing behemoths, Boston Beer is well positioned in malt categories, boasting a meaningful growth profile that mainstream beer lacks,” she wrote in a commentary.
“The firm has shown a remarkable proclivity to not only augment its portfolio in alignment with the latest growth vectors but to also capture a disproportionate share of the economic rents generated from this growth by being one of the first movers.”
That has shown out in “the company’s participation in the initial rises of craft beer, cider, and more recently, hard seltzer,” Katz said.
“While seltzer trends have recently slowed, we surmise sales at Boston Beer will continue to be supported by secular consumption shifts, such as the desire for a low-sugar footprint.”
Morningstar’s Take on Hain Celestial Group
Morningstar analyst Rebecca Scheuneman gives the company no moat and puts fair value for the stock at $37.50. It recently traded at $17.43.
“Recent challenges in no-moat Hain Celestial’s business have caused shares to fall 60% year-to-date (versus a 7% drop for the packaged food industry), creating a buying opportunity,” she wrote in an Oct. 3 commentary.
“As these headwinds abate and its turnaround continues to progress, we think shares will gravitate toward our $37.50 fair value estimate.”
That’s based on “our forecast for organic sales growth to accelerate to 7% annually … over the long term, while operating margins exceed 13% by 2027 (compared with flat organic sales and an 8% operating margin last year),” Scheuneman said.
“Further, we view Hain as a compelling acquisition target, and think suitors could pay 2.5 times sales, or $46 per share.”
