The Elephant in the Room

An elephant has wandered into the value investing room, and we need to address it. There are a gaggle (what is a group of stocks called?) of very cheap consumer defensive stocks selling near 5-year lows. Are they true values, or classic value traps?

I am leaning toward the idea that I need to own one of these big uglies. The perception of these stocks has never been worse in my entire investment career. Maybe I am trying to hard to “call the bottom”? That is a classic value investing mistake I am well aware of.

Since I started writing in late 2022 the S&P 500 is up roughly 50%, and PEP is down 30%. That swing is just too significant to ignore. I hate being a big cap investor. But when I compare the alternatives, I keep being attracted to the larger names. There will be a time for small caps, but right now there are opportunities in large caps.

Again it would be easy to just call out the cheapest stock and buy ConAgra at 10x and a 6% yield, but cheapest is not always best. There is too much competition in the frozen food aisle.

Below is roughly the order in which I prefer these stocks. I wish I could give you a neat dividend discount model to explain my choices, but that is not practical. 95% of my decision making process is sheer intuitive feel.

I am always impressed by the guys that are reinvesting in their businesses, not pushing the stock buyback button.

1. Pepsi - PEP - $130

   a. PEP has been reinvesting in the business, cap ex, advertising, and R&D, are up 50% in 6 years and buybacks have been minimal. Too me this is a positive, and new buybacks would be a pleasant surprise. Maybe an activist could emerge.

   b. expectations are low with only 6 Wall Street buys and 17 hold/sells

   c. PEP still has room to grow internationally. Americans drink 2x times more soft drinks, and eat 3x more snacks than those lazy foreigners. Insert smiley face here.

   d. PEP has built 22 brands of at least $1 billion. They deserve more credit for there level of new product innovation. Pepsi Zero is now a $10 billion dollar business, still growing in double digits

   e. the rise of RFK and MAHA are a risk, but the whole world already knows that

   f. does 16x make sense for 7-8% growth with a 4% yield???, I am leaning toward yes

   g. KO has done better because the have a spectacular international business, but PEP is getting better

2. General Mills - GIS - $55

   a. There is a decent portfolio of brands here, but cereal is still a negative issue

   b. I do worry about GIS’s school feeding business

   c. only 13x, but the risks are higher

3. Constellation - STZ - $172

   a. Buffett did just buy 7%

   b. right in the middle of the tariff fight, even though 70-80% of raw materials come from the US

   c. smart guys I have underestimated for 20 years

   d. if tariffs disappear, this is my second choice, but future is cloudy

4. Clorox - CLX - $128

   a. decent brands, but I am not really a fan of the CEO

   b. low expectations, only 4 buys and 17 hold/sells, but still 18x

   c. coming back from the cyber attack has been tougher than expected

   d. not a fan of complaining about ERP crap

5. Diageo - DEO - $105

   a. tariffs could be a big issue

   b, have moved customers to premium, but what is the next trick

   c. not enough drinking going on, gummies??

6. ConAgra - CAG - $55

   a. the frozen food business is still the fastest growing part of the supermarket, but competition is significant.

   b. this is the cheap one, only 10x with a 6% yield, 3 buys and 15 hold/sells

   c. snack business is only OK

7. Flowers - FLO - $17

   a. really bad quarter, why should bakery be so weak?

   b. very strange quarterly call, but decent presentation at Baird conference

   c. even some big growth guys own this including Wasatch

8. Smuckers - SJM - $111

   a. does the family ownership make this a better or worse idea??

   b. Hostess deal is either genesis, or desperation. Risky?

9. Campbell’s - CPB - $34

   a. there just is not much intelligent life on this planet. COVID was a big chance for the soup business, and they blew it.

10. McCormick’s - MKC - $74

    a. there is an interesting growth story here in sauces

    b. I worry about the tariff impacts on hundreds of spices from exotic locations

    c. moderate expectations, 5 buys, 11 hols/sells, but still 24x earnings

11. Keurig Dr Pepper - KDP - $33

    a. yikes, the Germans (JAB holdings) are running for the door, big secondary planned, not a good sign

    b soft drinks are fine, but coffee remains confusing

There are others, but these are my favorites.