As Britain voted in favor of leaving the European Union or what is widely called Brexit, the overall global economy could sense the aftershocks. Such a move has increased uncertainty and fueled volatility in world markets. We have already witnessed the pound crashing to its lowest level since 1985, with the sterling falling below $1.35.
In such a scenario, it seems unlikely that the Fed will hike rates anytime soon and may seek alternative monetary measures to stimulate the economy. Fed’s delay in raising interest rates will make investors jittery about investing in high-risk stocks. Further, this would elevate demand for government bonds and gold.
Consumer Staples Provides Stability
Amid these macro issues, investing in a safe haven sector is important and consumer staples is one such defensive sector. It fared well in the first quarter of 2016. Lower gas prices and increasing consumer confidence did the trick for these stocks. In fact, it should be kept in mind that the consumer staples sector has the potential to face the headwinds coming from continued Federal Reserve uncertainty, global market turmoil and continued volatility in the equity market.
Let us focus on one consumer staples stock – The J.M. Smucker Co. SJM – which can be a good choice for investors, amid global issues.
Why Smucker Is a Good Choice?
Low Beta Stock: Smucker has a beta of 0.53. A stock with less than 1 beta suggests that the price movement of the stock is not highly correlated with the market. Since they are less volatile than the market, they are safer bets at the moment.
Rank and Estimates: Seven out of eight estimates for Smucker – a Zacks Rank #1 (Strong Buy) stock – have moved north for fiscal 2017 over the past 30 days.
Quarterly Results and Outlook: J.M Smucker posted better-than-expected fourth quarter fiscal 2016 results primarily driven by gains from the acquisition of the Big Heart Pet Brands, gains from canned milk divestiture and favorable volumes owing to lower green coffee costs. Earnings of $1.86 per share were impressive as against a loss in the prior-year quarter owing to solid top-line growth and improvement in operating profits. Net sales increased 25% year over year benefiting from the acquisition and Dunkin' Donuts K-Cup pods(launched in May 2015). Smucker licenses Dunkin’ Donuts from Dunkin’ Brands Group, Inc. DNKN.
Strong organic sales growth, product innovation and constant efforts to expand through acquisitions have remained Smucker’s strong points. The recent acquisitions, the launch of Dunkin Donuts K-cup pods, expanding distribution for the Natural Balance pet brand are fueling sales and the trend is expected to continue in fiscal 2017.
Recovery in Coffee Business: Smucker’s coffee business exceeded expectations in 2016, driven by several factors including the successful launch of Dunkin' Donuts K-cups, the implementation of the planned Folgers canister downsize, a moderation in competitive activities, and the net benefit of lower commodity costs and pricing. Lower pricing on Folgers roast and ground coffee, due to lower green coffee costs, resulted in improved performance for the mainstream coffee business in 2016. In fact, the company expects momentum in the coffee business to continue in 2017.
Strategic Acquisitions: Smucker actively pursues strategic acquisitions both in the U.S. as well as overseas. The company completed the acquisition of pet food maker Big Heart Pet Brand in Mar 2015, which has exposed it to the fastest growing pet food and snacks category in the U.S. The acquisition significantly contributed to the top line in fiscal 2016.
In the past too, the company had added meaningful brands to its portfolio. For example, with the acquisition of Seattle, WA-based Sahale Snacks, Inc. in Sep 2014, the company received a new snacking brand of premium, branded nut and fruit snacks. The acquisition of Enray Inc., a manufacturer and marketer of premium organic, gluten-free ancient grain products – in Aug 2013, gave the company the ownership of Enray’s flagship brand truRoots, which has helped it to grow across the rapidly growing gluten free market. The acquisition is expected to add sales in excess of $50 million on an annual basis, thus increasing the scale of the company’s natural foods and specialty businesses.
Other Key Picks
Investors may also have a look at these other well-ranked food stocks such as Omega Protein Corp. OME and B&G Foods, Inc. BGS, both sporting a Zacks Rank #1.
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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
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