The Bare Necessities

Image source: Daiquiri, Archiwiz, M. Unal Ozmen, Voronina Svetlana - Shutterstock, Disney @Disney - Giphy

What's going on?

Drinks magnate Coca-Cola and tobacco firm Philip Morris (PM) can forget about their worries and their strife for a moment: the “consumer staples” companies both reported better-than-expected earnings on Tuesday.

What does this mean?

Consumer staples companies sell essentials that people tend to buy no matter what, which was pretty clear from PM’s results: the tobacconist had the addictive qualities of its smoky wares to thank for its own stronger-than-expected quarter. Coke, meanwhile, reported a profit that beat investors’ forecasts, even as the number of products it sold in April and May shrank. That might’ve been because about half its revenue comes from home drinkers, unlike arch-rival Pepsi which relies more on eat-out locations. The cash it saved late last month might’ve helped too: the soda purveyor announced it’d pause all social media advertising for 30 days.

Why should I care?

For markets: Sitting on defense.

The seemingly ever-present demand for consumer staples’ products gives their stocks a “defensive” quality that investors look for in an economic downturn. Stable demand makes it easier to predict how much those companies are likely to earn – and at a time when American companies are expected to report 44% lower profits than the same time last year, that relative certainty can give defensive stocks the edge over their “cyclical” counterparts, whose earnings rise and fall with the economy.

The bigger picture: So Shere Khan of you.

Shares of companies that enable vices like high sugar consumption and smoking are sometimes referred to as “sin stocks”, and some investors avoid buying them for ethical reasons. But those undesirable characteristics are precisely what make such companies attractive to less conscientious investors, since lots of customers are hooked on their products. Just look at cigarettes: their prices have risen relentlessly around the world, but PM still managed to shift 766 billion packets last year.

Originally posted as part of the Finimize daily email.

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