How Has the Consumer Equity Sector Handled the Pandemic?

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Erin Lash: The consumer defensive sector continued on an upward trajectory in the fourth quarter, rising at a mid-single-digit clip. However, this performance lagged the market's low double-digit gains. After accounting for the appreciation, we view the consumer defensive space as modestly overvalued at present, trading at a 7% premium to our fair value estimates, which is a significant jump from the 2% discount we ascribed to the sector in September. However, pockets of value remain with particular opportunities in the consumer products and retail defensive arenas. We'd highlight wide-moat Kellogg K as one such opportunity. While the firm has benefited from pandemic-related stock-up trips of consumers for essential items, we think the firm had been laying the groundwork to reignite its top-line trajectory even prior to the pandemic. More specifically, over the last several years, Kellogg has taken steps to move away from direct store distribution in favor of warehouse delivery, divesting of noncore brands and businesses, and upping its investments behind both its manufacturing capabilities and its brands. As such, we think the firm is poised to reemerge from the pandemic in a stronger competitive position. Heading into the upcoming earnings season, we will be keen to gain insights into the competitive landscape across the consumer products arena. More specifically, since mid-March, the competitive landscape has been quite sublime as consumers and retailers have found favor with leading branded operators that possess the resources and wherewithal to keep shelves stocked to a much greater extent than their smaller peers. In addition, supply/demand imbalances have resulted in promotional spending grounding to a halt. However, we don't expect that these conditions will persist longer term, particularly as concerns surrounding the virus subside once a vaccine is more widely disseminated in mid-2021. As a result, we think those operators that continue to spend behind both their brands and entrenched retail relationships will be best positioned to weather the environment in a post-COVID world.