3 Staples Stocks to Cushion Lower Consumer Sentiment

Key Points

• As U.S. consumer sentiment contracts from its 3-year peak, the consumer staples sector could take over this cycle.
• Three stocks show investors double-digit upside and up to triple-digit EPS growth this year. 
• Above peers and calling institutions to buy them, these names offer a potentially smoother ride in the coming quarters. 

Are investors in the clear for the rest of 2024? The first quarter of the year, arguably the most important as it sets the tone for what could be in the works, shows investors some of the potentially growing cracks in the economy. It is the consumer staples sector that could become the next safe haven. Recent price action in consumer discretionary stocks is a foundation for this belief. 

After reaching a 3-year high, U.S. consumer sentiment retraced to its worst levels since 2022, implying that not all is okay with the consumer sector. Discretionary stocks like Netflix Inc. NASDAQ: NFLX are down nearly 20% after reporting first-quarter results, showing potentially tighter budgets from the consumer end. 

For these reasons, consumer staples stocks like Dutch Bros Inc. NYSE: BROS, RH NYSE: RH, and even Chewy Inc. NYSE: CHWY could be worthy watchlist additions in the new cycle. More than applying logic, here’s why each of these names carries their own merit. 

Coffee: It’s a Necessity

Demand for coffee will likely hover around a tight median, regardless of whether the economy is booming or busting. For this reason, some on Wall Street see a double-digit upside in shares of Dutch Bros. 

Those at J.P. Morgan Chase & Co. NYSE: JPM assigned a $40 share price target for Dutch Bros stock, calling for a 48% upside from where it trades today. More than that, the Vanguard Group saw it fit to start adding to the stock as recently as last quarter. 

Among the $308 million in institutional inflows during the past 12 months, Vanguard represented roughly half at a total investment of $150.5 million. A quality stamp from the asset manager could have given markets the comfort they needed to bid the stock higher. 

Analysts think the stock could grow its earnings per share (EPS) by as much as 34.6% this year, compared to the beverage industry’s average 10.5% growth. Even its biggest competitor, Starbucks Co. NASDAQ: SBUX, can’t reach that high a growth rate, at only 15% projected for the year. 

Trading at 75% of its 52-week high is one way to see how far Dutch Bros stock needs to go to catch up to its former glory. Markets, however, may feel confident that it could, as the forward P/E ratio rose to 64.3x compared to the industry’s 16.3x valuation. 

Markets are willing to overpay for this stock and not its peers, so there must be a good reason behind this valuation. One reason is the company’s balance sheet, which shows a debt of 50% of total assets compared to Starbucks’ 150%. 

Because the timing of Federal Reserve (the Fed) interest cuts remains uncertain, Dutch Bros’ balance sheet and EPS projections give investors the better consumer staples bet this time. 

Chewy’s Duty to Furry Family Members

Just like any other family member, pets need to be cared for through food and medicine. In this way, Chewy stock is no different from Eli Lilly Co. NYSE: LLY or Kraft Heinz Co. NASDAQ: KHC, only in the way it is projected to grow this year. 

Analysts think Chewy's EPS could grow by 162.5%. The fact that the stock trades at only 37% of its 52-week high makes it a potentially irresistible discount. So bold is this proposition that even The Goldman Sachs Group Inc. NYSE: GS had to make its view known. 

The bank’s analysts slapped a $32 a share valuation for Chewy, daring the stock to rally by 113% from where it sits today. Knowing that one of Wall Street’s biggest investment banks is behind Chewy, bears decided to back down. 

Over the past month, Chewy’s short interest contracted by 11.4%, all the while Vanguard boosted its position in the stock by 13.5% in the past quarter, bringing the asset manager’s total investment to $226.9 million. 

The RH Discount

Warren Buffett decided to bet on a U.S. residential construction boom, leading him to buy names like D.R. Horton Inc. NYSE: DHI. Because new housing inventory needs to be furnished, stocks like Williams-Sonoma Inc. NYSE: WSM more than doubled in the past 12 months. 

However, shares of RH were left behind, now trading at only 60% of their 52-week high. Knowing that the real estate bottom is approaching and furniture demand could pop, analysts at Barclays NYSE: BCS and others saw fit to boost RH’s ratings.

A $340 price target from Barclays would call for a 39% upside from today’s prices. Those at Wells Fargo & Co. NYSE: WFC see an even richer valuation, shooting for up to $360 a share, or a 47% upside, from today.

Compared to Williams-Sonoma’s consensus $248 price target, representing a 12.2% downside, RH stock looks like a much better potential deal in the furniture space. 

While not entirely a staples play, investors can consider RH’s products a necessity in the current cycle, which should last long enough for the Fed to decide whether to cut rates this year.