The food industry business has been grappling with headwinds like food deflation, stiff competition, and aggressive promotional environment of late. Traditional grocery rivals are strengthening their franchises and outside players are offering alternative outlets for food and other staples. Customers are becoming more inclined toward private label products as they are low-cost alternatives to national brands. Food deflation across major parts of the market from the last two quarters have added to the woes. Oversupply in some types of food - particularly meat, poultry and dairy - has dragged prices lower and forced grocery stores into more aggressive promotions.
Amid such a scenario, e-Commerce biggie Amazon.com, Inc. AMZN announced an all-cash $13.7 billion deal on Jun 16, to acquire the natural and organic foods supermarket chain Whole Foods Market Inc. WFM , raising pricing and competition concerns among competitors, thus washing out about $35 billion market value of the majority of the supermarkets, food producers, shopping malls and payment processors in the U.S. market.
Amazon's Move and its Impact on the Food Industry
Amazon has been making efforts to enter the grocery industry for the past few years to strengthen its foothold in offline as well as online retail space. Amazon has also been testing waters with innovations such as drive-in-grocery delivery service (AmazonFresh Pickup - order groceries online and collect them from a store nearby) and cashier-less stores (Amazon Go - the company's first brick-and mortar grocery store). It has also added online and offline features to its bookstores.
The Whole Foods deal, which is expected to conclude in the second half of this year, will give Amazon an opportunity to leverage Whole Foods' 460 stores across the U.S., U.K. and Canada along with 87,000 employees and its solid reputation. The acquisition could cater to the niche market that prefers to buy quality products at a premium price, thus adding more value to Amazon's sales volume.
Post the acquisition, Amazon might lower prices at the premium grocer by automation, headcount reduction and inventory changes. With Amazon's huge cash balance and expansion capabilities, we believe such acquisitions can change the retail landscape and ward off competitors.
The possibility of lower grocery prices with this Amazon-Whole Foods deal has given a great blow to grocery stores and supermarkets as they may experience pricing pressure and lose customers. Some investors also worry that Amazon's entry would squeeze profit margins in an industry already known for stiff competition and tight margins. These concerns have significantly hurt share prices of big grocery and supermarket chains including Kroger Co., Supervalu Inc., Costco Wholesale Corporation, Sprouts Farmers Market Inc., United Natural Foods Inc., The Wal-Mart Stores, Inc. and Target Corp. on Jun 16.
The Amazon-Whole Foods deal has also brought shares of Sysco Corp. SYY and US Foods - two largest players in the food service distribution industry - under pressure. Since the announcement of the deal, Sysco's shares have declined 10.1%, underperforming the Zacks categorized Food-Miscellaneous/Diversified industry's 3.9% fall. It is estimated that both Sysco and US Foods will each derive at least 30% of revenues serving the independent restaurant category.
The entry of Amazon has made investors skeptical and has caused a disruption in the grocery segment, which is already grappling with headwinds like food deflation, stiff competition and aggressive promotional environment.
Consumer Staple Stocks - A Safe Haven
Amid such a scenario, you need to position yourself in stocks with the strongest chances of long-term success. The consumer staples sector is considered as the most attractive bet in times of economic turbulence. Stocks of consumer staple companies are poised to grow, as evident from the renewed consumer spending strength. Per the Zacks Earnings Trend , earnings of the consumer staple companies enlisted on the S&P 500 are expected to increase 2.7% on 1.6% revenues for second-quarter 2017 as of Jun 23.
How to Pick the Best Stocks?
Fetching higher returns amid such an investment climate is a herculean task. Just picking stocks on the basis of their price performance is not a good investment decision. One should check out the other factors before zeroing in on the profitable stocks.
With the help of our new style score system, we have identified three consumer staples stocks that have excellent prospects and are good bets in this uncertain market. Such stocks also boast a VGM score of 'A' or 'B'. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Our research shows that stocks with VGM Scores of 'A' or 'B' when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential. Such a score allows you to eliminate the negative aspects of stocks and select winners. You can see the complete list of today's Zacks #1 Rank stocks here .
Headquartered in Philadelphia, PA, AramarkARMK carries a Zacks Rank #2 along with a VGM Score 'A'. The company offers food services, facilities management, uniform and career apparel to health care institutions, universities, school districts, stadiums and businesses. The company has a long-term earnings growth rate of 12.00%, which also makes it a viable investors' choice.
Coming to the share price movement, the stock rallied 15.4% over the past six months, as against the Zacks categorized Food-Miscellaneous/Diversified industry's decline of 3.8%.
Investors can also count on London-based Unilever, PlcUL , which operates in the fast-moving consumer goods industry worldwide. It carries a Zacks Rank #2 along with a VGM Score 'A'. It has a long-term earnings growth rate of 11.98%.
Its share price movement shows that the stock rallied 36.28% in the past six months, outperforming the Zacks categorized Soap & Cleaning Preparations industry's gain of 16.27%.
We also suggest investing in Service Corp.SCI , the largest provider of funeral and cemetery services in the world. The company carries a Zacks Rank #2 and has a VGM Score of 'B'. The stock has a long-term earnings growth rate of 10.50%. If we look into its share price movement, we note that the stock rallied 14.84% in the past six months, outperforming the Zacks categorized Funeral Services industry, which gained only 2.52%.
We believe that investing in these companies should safeguard your portfolio in the short term and yield higher returns amid food industry concerns.
Sell These Stocks. Now.
Just released, today's 220 Zacks Rank #5 Strong Sells demand urgent attention. If any are lurking in your portfolio or Watch List, they should be removed immediately. These are sinister companies because many appear to be sound investments. However, from 1988 through 2016, stocks from our Strong Sell list have actually performed 6X worse than the S&P 500.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.