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Need Stronger Staples?
Issue // January 24, 2023
UPDATE
It’s Lunar New Year!
By The MARK IT. Team
🌤️ Good morning, and happy Tuesday. We hope you had a restful weekend and Monday workday. Sunday evening was the Lunar New Year so perhaps you got to see (or not see) the new moon that marks the start of the new year.
We’re also excited for you to read this week’s issue because we added a MARK IT. Explained section where our contributing editors explain market trends and current events more in-depth, so you can expand your understanding of investing with each issue.
WEEK IN REVIEW
Consumer Staples Are Safe Until They Aren’t
By Abbas Akhtar
Yesterday was the first Monday that wasn’t a market holiday since the Q4 2022 earnings season started, since last week was MLK day. On the off-chance that you check your investments in the morning, you may notice there’s higher volatility and faster movement in general, but that’s especially true for Monday. This is widely believed to be due to orders piling up over the weekend and stock prices reacting to potential bad news that companies release Friday night.
Last week, however, was a difficult week for one industry in particular and it seemed like a stark contrast to the market performance that we reported in last week’s issue Stepping on the Gas. Consumer staples crashed with Kraft Heinz (KHC) leading the way, dropping a whopping 5.79% from Tuesday to Friday close. General Mills (GIS) also dropped 5.38% within that same time. The S&P overall dropped from Tuesday to Thursday but almost entirely recovered on Friday. What are consumer staples stocks?
WEEKLY WATCHLIST
Cola Wars
Although consumer staples as a whole seemed to suffer last week, we wanted to highlight two stocks in particular that are classic American brands with products that aren’t limited to their respective namesakes.
Both of these companies are similar in general structure, cash flows, and dividend payouts. We think these companies will have key movements in the next few weeks. We’ll explore further below.
STOCK #1
Coca-Cola (KO)
Arguably one of the most recognizable brands globally, Coca-Cola products are sold in almost all countries and the company has a solid reputation for investors. In the S&P 500 index, Coca-Cola is the 25th highest weighted; legendary investor Warren Buffet has Coca-Cola as his #4 largest holding.
Starting in late October, KO stock had been on a sharp upward trend following a bottoming out at $53.63 per share (its 52-week low). After recovering well throughout November, the stock once again seemed to begin declining very late December, dropping below the 60-dollar mark on Friday.
KO Stock (6-month), via Google Finance
✅ Increasing cash flows: The past 10 years have seen steady rises in free cash flows with the past 5 having exceptional growth after growth decreased in 2017.
✅ Great dividend: With a 2.92% dividend yield, Cola-Cola has a great dividend. The company has also paid consistent dividends for 59 years.
✅ Undervalued according to DCF: Based on our discounted cash flow model, a single KO stock at Monday’s market close price of $60.23 would be between 20-25% undervalued–very good news for value investors.
✅ Low debt: Of the total Enterprise Value (EV) of Coca-Cola, debt is approximately 14% compared to a market cap of 86%.
STOCK #2
Pepsi (PEP)
Pepsi is on this list because it’s very similar to Coca-Cola (not to mention its biggest competitor). Pepsi is also one of the most recognizable global brands, and in the S&P 500 index, it’s the 24th highest weighted.
Pepsi, following closely with the consumer staples industry, was on a general upward trend in late October following a bottoming out and hit its all-time high of $186.84 mid-December. The stock, however, began to drop fast soon after, and as of Monday’s close trades at $169.12.
PEP Stock (6-month), via Google Finance
✅ Solid cash flows: Within the past 10 years, Pepsi’s free cash flows have increased steadily year after year with the exception of a 2016-2019 drop-off.
✅ Great dividend: With a 2.72% dividend yield, Pepsi has a similar dividend compared to Coca-Cola in terms of yield and has consistently paid for 34 years.
🛑 Overvalued according to DCF: Based on our discounted cash flow model, a single PEP stock at Monday’s market close price of $169.12 would be between 11-14% overvalued. However, if the recent downward trend continues and puts the stock below intrinsic value, expect value investor attention.
✅ Lower debt: Similar to Coca-Cola, of the total Enterprise Value (EV) of Pepsi, debt accounts for approximately 15% compared to a market cap of 85%.
MARK IT. EXPLAINED
What is the Debt Ceiling (and How Does it Affect Markets?)
By Rahul Kannam
First, let’s look at what the debt ceiling is. An encompassing definition is how much money the U.S. or its treasury can utilize (borrow) to pay for expenses or bills. The debt ceiling is also a limit to how much debt the government can take on to pay for projects, infrastructure, etc. There must be a limit because unlimited borrowing can have long-term consequences down the road like paying astronomical interest and lacking funds to do so.
So how does this affect the overall market? One vital market that gets affected is the bond market; if the government risks defaulting on debt or loans it has to pay, then investors demand higher interest rates in exchange for the higher risk they deal with. Note that these are potential issues that linger as the debt ceiling is currently being debated in congress. Keep an eye on the movement of the bond market and pay attention to how the debt ceiling can influence markets in the coming weeks.
ONE MORE THING
Keep in Touch
For general announcements or updates on what we're working on, follow Abbas on Twitter 👉 @RealAbbasAkhtar
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Thanks again for reading!
