Sifting through underearning consumer staples stocks

Amid elevated inflation, Fidelity's Marc Grow is seeing attractive investment opportunities in the defensive consumer staples sector.

• In a challenging environment for consumers amid the ongoing cost-of-living crisis, Fidelity's Marc Grow has turned to the consumer staples sector, where he's found several attractively valued companies that he believes are underearning, despite their attractive long-term upside.
• "By underearning, I mean these businesses are generally less profitable than they could be under normal circumstances, primarily due to inflationary headwinds," says Grow, portfolio manager of Fidelity^® Small Cap Stock Fund.
• With the price of goods steadying but still historically high, a number of consumer staples firms have been unable to sufficiently increase pricing fast enough to offset their elevated input and logistics costs, according to Grow, who believes buying shares of high-quality businesses with capable and honest management teams has the potential to yield superior risk-adjusted returns over time.
• He targets companies trading at a discount to his assessment of their intrinsic, or fair, value, and he also considers fast-growing and low-quality cyclical stocks when the broader market, in his view, misprices their potential.
• As examples, Grow cites the portfolio's sizable stakes in Nomad Foods, Lassonde Industries, and Boston Beer, noting that he feels investors have priced these companies' stocks as if their earnings power will remain weak for the long term, whereas Grow sees these challenges as shorter term.
• "For each, I expect costs to normalize as inflation abates," Grow explains, "which could lead to a considerable jump in earnings and stock prices."
• Grow's conviction also is based on the stocks' attractive valuations and defensive characteristics, which he believes could help insulate them, to an extent, should the economic backdrop deteriorate.
Securities mentioned were notable fund holdings as of August 31.