How to invest in consumer staples companies

TL;DR

  • Consumer staples are companies that produce items we consume every day such as food, beverages, and non-durable household and personal products.
  • It is an industry worth more than $3 trillion in 2019, according to Statista.
  • Some people invest in consumer staples companies to protect themselves from downside risk during an economic downturn as these companies produce essential items we need on a daily basis even during a recession.

Think about the things you use on a regular basis: coffee, toilet paper, hygiene products, and household cleaners. Those are all consumer staples. Consumer staples are any essential product that people buy at a relatively constant level, regardless of price. For some, consumer staples may mean sugary drinks; for others, they may mean tobacco products. Consumer staples are defined only by the frequency of their purchase.

Given how essential consumer staples are in our day-to-day lives, as a group, the tend to be less sensitive to external factors that may disrupt companies in other industries during an economic downturn. We may put off going on vacation when times are tough, but we will always need products such as toilet paper and shampoo. Thus, companies that produce or sell these essential products are often large and stable blue-chip stocks, which is a competitive strength.

However, these stable blue-chip companies may view their size as a weakness when there is a shift in consumer demand. For example, both Coca-Cola and Procter & Gamble (both companies can be found in Public’s Pantry Essentials theme) spent decades transforming their operations to stay competitive, while smaller rivals were able to make quick adjustments to operations. Thus, while consumer staple companies are stable and low-risk investments, there is no guarantee that consumer staple stocks will stay competitive in the next market trend.

The consumer staples sector is the sixth largest industry among the 11 main sectors that make up the economy. As of mid-2019, consumer staples stocks accounted for $3.6 trillion in total market capitalization, according to The Balance.

There are about 100 publicly-traded consumer staples companies, with the majority of them priced above $100 per share. As these big companies ask for a higher cost per share, many people with low investment budgets usually don’t have enough money to invest in big companies flexibly. This leads to the current public market status quo that only the wealthiest can capitalize on long-term investing.

Fractional shares, aka slices, change all of that. Thanks to slices, investors can buy stocks without having to purchase the whole share. Now, you can invest in your favorite consumer staples companies with whatever dollar amount you want and have. For example, if a company you like is trading at $100, but you have only $20 to invest, you could now buy 20% (or 1/5) of a share of that company. Should the price of that stock rise and you decide to sell, you would earn a return in proportion to your original slice.

This can be helpful if you want to buy a stock that is more expensive than what you have budgeted. Buying slices of shares in different companies enables portfolio diversification, and could, therefore, lower your portfolio risk exposure to one single stock. In other words, instead of having all your money tied up with one share of a pricey stock, you can now buy slices of one share in multiple stocks. Buying slices of shares in different stocks helps diversify your investments, thus potentially reducing your risk and maximizing potential returns.

What qualifies as a consumer staples company?

Like we said, consumer staples are companies that either produce or sell products that people buy on a regular basis. Consumer staples products include food, personal care items, beverages, and tobacco products. Companies own stores that sell consumer staples products are also considered as consumer staple companies. Supermarket chains such as Target, Sprouts Farmers Market, and Costco are great examples of consumer staples stocks, all of which can be found in Public’s Pantry Essentials theme.

Why do some people choose to invest in consumer staples?

Consumer staples have historically well during a down phase of an economic cycle. When the economy is in a recession or a period of slow growth, consumer staples companies can continue to generate sales and profits as consumers still need to buy daily essential products. For example, people will still need to buy essential home products from retail stores such as Bed Bath and Beyond, Home Depot, and Lowe’s even during a recession. All the companies mentioned above can be found in Public’s Home & Garden theme.

The consumer discretionary sector includes products that people may only purchase when they have excess cash. Companies from the consumer discretionary sector include online luxury clothing shops and travel agencies such as The RealReal, StitchFix, TripAdvisor. All these companies can be found in Public’s Click it, Ship It theme. These companies often experience growth when the broader economy is strong. During an economic downturn, discretionary products usually experience a slow down of sales.

How do you find consumer staples companies to invest in?

You may not realize that some of the big-name brands you’re purchasing your daily products from are available to buy (in the form of shares!). It’s helpful to create a watchlist of stocks and ETFs in the consumer staples sector and get familiar with what are included in the theme. On the Public app, you can start with any stocks and ETFs that interest you, marking them as favorites without investing and keeping an eye on them as part of your daily or weekly routine.

Follow news and updates from companies and ETFs you are interested in can help you stay up to date. You can learn a lot about them every day by keeping an eye on relevant market news from the news feed in Public’s app. For all of the same reasons that a big part of being a good writer involves reading, being a great investor means researching and doing your due diligence. Learning, tracking, and staying engaged can help you build your knowledge.

The bottom line

Some investors own shares of consumer staples companies to diversify their portfolios and reduce risk. Historically, Companies in this sector either produce essential goods we buy daily or operate retail stores that sell these essential goods. In other words, trends in this sector tend to be consistent no matter what’s happening outside of the business world, and therefore are appealing to investors who want to diversify their portfolio during periods of economic volatility.

The above content is provided is paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

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