3 Consumer Discretionary Stocks That Still Have Pricing Power

Key Points

• Earnings growth predicts stock price growth and pricing power drives earnings growth.  
• PepsiCo: After a recent pullback PEP stock is ready to move higher. 
• Johnson & Johnson: More clarity is brightening the picture for JNJ stock. 
• General Mills: Investors are starting to look past mixed earnings and focusing on the long-term value.  

What’s one of the best predictors of stock price performance? If you said earnings growth, you’re right. But what is a reliable indicator of earnings growth? That would be pricing power. A common feature of many stocks that deliver reliable earnings growth is an ability to maintain high profit margins even at times when overall consumer demand may be slumping.

Pricing power is experienced by consumers as inflation. Producers experience this inflation too. But the most profitable companies can pass along at least some of those price increases to consumers. This is particularly true with popular brands which often come with higher levels of brand loyalty. 

Since investors are also consumers this creates an interesting dynamic. As consumers, we may not like paying higher prices for the brands we enjoy. However, as investors we know that owning companies that have pricing power are likely to inflate our portfolio.  

Investors frequently find stocks with pricing power in the consumer staples and consumer discretionary sectors. That’s because these sectors are less subject to cyclical or macroeconomic conditions. Here are three consumer discretionary stocks that have recently given investors confirmation of their pricing power.  

Thie Dividend King Offers a Chance for Refreshing Growth  

PepsiCo, Inc. NASDAQ: PEP is up about 2% in the last three months. That may draw raised eyebrows from investors who are shifting to growth stocks. But that performance includes a decline of nearly 10% in May. 

Investors shouldn’t worry. That pullback is giving PEP stock room to run higher. And a look at the company’s recent earnings report shows why pricing power is the reason for the bullish sentiment.  

Simply put, the company posted 10% year-over-year earnings growth. This is despite the fact that interest rates have risen sharply in the last year and food inflation has remained sticky. Pepsi also increased its guidance above that of the analysts for the rest of the year.  

PEP stock recently broke up both its 10- and 50-day simple moving averages. This puts it at a key level of resistance around $190. If it can break higher, a record high could arrive before the company’s next earnings report in October.  

JNJ Investors May Soon Get Much-Needed Relief 

For the last five years, Johnson & Johnson NYSE: JNJ has been a stock that only value investors could truly love. JNJ stock is up about 29% in the last five years. That’s an average of almost 6% growth every year. But even with a dividend that currently yields around 2.8%, JNJ may not have been appealing to investors looking for both growth and value.  

It’s important to remember that during that time, Johnson & Johnson was embroiled in the now resolved talc lawsuit. While the impact of that settlement will come out of earnings over the next several years, the ocmpany has also spun off its consumer division into a separate company.  

The point of all that is to say that JNJ is offering investors a much clearer picture. And in its last quarter, it offered them year-over-year earnings growth of nearly 10%. This is putting the stock at an inflection point, particularly as analysts are starting to weigh in on the company’s earnings report. While the Johnson & Johnson analyst ratings haven’t shown an upgrade yet, several analysts have already boosted their price targets for JNJ stock.  

General Mills Offers Value That Goes Beyond Mixed Earnings 

Over the last five years, General Mills, Inc. NYSE: GIS has rewarded investors with stock price growth of over 70%. And that goes along with a dividend that currently yields just over 3%. 

But in the last year, General Mills has been telling investors a different story. GIS stock is “only” up about 5% in the last year. And while other stocks have been rallying, GIS stock is down over 11% in the last three months.  

Some of that is due to the company’s mixed earnings. Revenue was higher but earnings were flat on a year-over-year basis. Of greater concern may be that the company reported a mixed picture on margins. Gross and operating margins were down year-over-year, but the adjusted gross margin was higher.  

But I’ll turn your attention back to the chart action with PepsiCo. That is, the pullback now gives investors room to GIS stock higher. And on July 14, Argus upgraded GIS stock with a $90 price target that is approximately 10% higher than the consensus estimate.