Constellation Brands, Coca-Cola, and Other Safe Staples Stocks for a Possible Recession

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Recession risks are growing, and investors are looking for safety. But not all safe stocks are created equal.

Take consumer staples. Their businesses tend to hold up better during recessions because people will continue to buy food and other necessities even as they cut back on, well, everything else. That’s one reason that the

Consumer Staples Select Sector SPDR
exchange-traded fund (ticker: XLP) has dropped just 7.5% so far this year, far better than the

S&P 500’s
19% decline.

Yet while

Campbell Soup

(CPB) has gained 9.7% this year,

Keurig Dr Pepper

(KDP) has risen 0.8% and

Coca-Cola

(KO) has advanced 0.6%,

Spectrum Brands Holdings

(SPB) has slumped 54%,

Coty

(COTY) has dropped 27%, and

Newell Brands

(NWL) has fallen 25%. Clearly, some staples stocks are safer than others.

But will they stay that way? A recession may be on its way, but it is likely to be a different kind of recession than the ones experienced in 2001 and 2008 because of today’s high inflation.

That means investors should be focusing on companies that have pricing power and avoiding those with products that could be replaced with cheaper alternatives or that consumers could quit, writes RBC analyst Nik Modi. The latter cohort includes

Altria Group

(MO), which has “high exposure to lower-income consumers,” and companies that can be replaced easily with private labels, such as

Kimberly-Clark

(KMB)—you don’t have to buy Kleenex tissues—

Clorox

(CLX)—there are alternatives to Glad trash bags—and Campbell Soup.

Instead, Modi recommends focusing on companies that aren’t threatened by private-label options, have manageable costs, and aren’t reliant on lower-income shoppers. It also helps if they “have made investments in their business to improve the organizational structure resulting in better business trends…and are driving pricing/promotional strategies suitable for a period of economic uncertainty,” Modi says. Coca-Cola, Coty, Keurig, and

Constellation Brands

(STZ) are among the stocks that fit the bill.

Constellation looks particularly attractive. The Corona beer importer is less focused on wine these days, and it never chased the hard-seltzer fad, as did

Boston Beer

(SAM), which has tumbled 35% this year. At 20 times 12-month forward earnings, the stock isn’t cheap, but it’s trading slightly below its five-year average of 21 times. Demand for beer remains strong, too.

Just as important, Modi notes that Constellation learned from the last recession, when it let the gap in pricing between Corona and its competitors get too wide, to the detriment of sales, and has changed its strategy. In recent years, the company has been raising prices in small, consistent increments. Constellation should be able to maintain the strength of its brands in a way that should last through a recession.

We’ll see if it works this time.

Write to Ben Levisohn at [email protected]