Eat, drink and be merry. For tomorrow we profit?
Food and beverage stocks have been on a tear lately.
Coke, Pepsi, General Mills, McDonald’s, Campbell Soup and Molson Coors each hit new all-time highs earlier this week.
And Corona brewer Constellation Brands surged 4% Wednesday to a new record high following a strong earnings report.
It makes sense. While there are still concerns about sluggish global economic growth, these food and beverage stocks are all pretty defensive. Their sales and earnings should continue to grow, albeit slowly, even in tough times.
The concern though is that many of these stocks may now be a little pricey.
Take Coke, for example. Shares trade at 24 times this year’s earnings estimates — even though profits are expected to grow at just a 2% clip annually, on average, for the next five years.
Compare that to a tech giant like Alphabet. (I still want to just call it Google.) It is valued at 22 times 2016 profit forecasts. But analysts are forecasting much higher growth for Alphabet than Coke — 16.5% a year for the next few years.
Still, one money manager said that many blue chip food and beverage stocks are worth the higher price because of their consistency.
“With investors still walking on eggshells, multinational consumer staples stocks will do well. They have more predictable earnings,” said Ted Parrish, chief investment officer at Parrish Capital. “They are not cheap, but many deserve the premium.”
Two food and beverage stocks that Parrish likes and owns are Diageo — the parent company of Guinness, Johnnie Walker and Smirnoff — and organic food company Hain Celestial.
Most of these stocks all pay tasty dividends as well.
Coke, Pepsi, General Mills and McDonald’s have dividends that yield nearly 3% — much better than the paltry 1.74% you’d currently get from a 10-Year U.S. Treasury bond — not to mention the barely above zero yields for many European bonds.
So as long as interest rates around the world remain low, investors may continue to gobble up food and beverage stocks.
