What are we looking for?
Consumer staples companies sell products that are in demand no matter how well or how poorly the economy is performing. My colleague Rob Belanger and I decided to take a closer look at this sector to find those stocks that may be undervalued.
We started with the 40 companies that comprise the Consumer Staples sector of the Standard and Poor's 500 Index. To be included in our list, the companies had to have lower metrics than the sector's average in all four of our categories.
The price-earnings ratio (P/E) measures a company's share price compared to its per-share earnings. Generally, a lower ratio is better.
Price-to-free-cash-flow (P/FCF) compares a company's market price to its level of annual free cash flow, which is operating cash flow reduced by the capital expenditures. The higher the number, the more overvalued the company is considered.
Enterprise value (market value of debt plus equity, minus cash) divided by earnings before interest, taxes, depreciation and amortization (EV/EBITDA) is one of the most commonly used valuation metrics. We are looking for a low number.
Price-to-tangible-book value (P/B) compares a company's stock market value to its tangible book value, which is the net asset value of a company minus its intangible assets (goodwill, patents) and liabilities. This ratio gives you some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.
What did we find?
Only 14 of 40 companies passed our test.
Based in Arkansas, and with operations in 27 states, Tyson Foods Inc. is one of the better companies on our list. The biggest U.S. meat processor scores well in all our categories, and has the best P/E and EV/EBITDA.
An honourable mention goes out to agricultural processor Archer-Daniels-Midland Co. The company turns grains into food at more than 265 plants in 140 countries. It scores the best P/FCF and P/B.
Cautious investors may want to steer clear of the stocks with the highest P/B ratios. They belong to bottler Coca-Cola Enterprises Inc. and snacks-and-beverage giant PepsiCo Inc.
While the relatively safe, defensive names in the consumer staples sector may provide a great way to hedge your investment portfolio, it is still advisable for investors to contact a professional or conduct further research before buying.