In recent months, Campbell Soup has be divesting businesses like Bolthouse Farms and Garden Fresh Gourmet salsa in order to focus on its “bread and butter,” the soup and snack business such as Prego pasta sauces, Kettle potato chips and Perpperidge Farm cookies, etc. As a result, the company has introduced new soups and taking out preservatives to appease this “alternative beef” culture.
On Friday, Campbell Soup Co reported better-than-expected fourth-quarter profit including net sales from continuing operations rising 2% to $1.78 billion compared with a year-ago quarter. This news was enough to send the stock soaring almost 10% that day. But lets not get things twisted. Campbell recorded a net loss of $8 million, compared to a profit of $94 million last year. They have almost $10 billion in debt and any cash flow is going towards paying that debt.
From a fundamental standpoint, yes, Campbell had a quarter that bet expectations, but the expectations were sub-par. And from a consumer demand standpoint, Campbell’s is selling its fresh food businesses to refocus on snacks and meals and beverages. Millennials want good, fresh, healthy food like cage-free eggs and preparation meals with fresh ingredients.
So, there is only one reason Campbell’s stock price is rising. Instead of looking at financial markets or asset classes on an individual basis, intermarket analysis looks at several strongly correlated markets or asset classes, such as stocks, bonds and commodities. In the case of stocks, sector rotation involves the movement of money from one industry sector to another in an attempt to beat the market. And at market tops, yield curves invert, industrial production declines and consumer confidence decides, all signals that tell investors to get defensive. And in this type of environment, consumer staples is one the sectors that lead the way.
I also like to apply ratio analysis to the sectors in order to find the sectors with the greatest relative strength (the analysis above was comparing each sector to the S&P 500).
The consumer discretionary sector is characterized by those businesses that tend to be the most sensitive to economic cycles, including hotels, restaurants, etc. and the consumer staples sector is made up of companies whose businesses are less sensitive to economic cycles…non-durable household goods and personal products…companies like Clorox, Proctor and Gamble (P&G), Kelloggs, etc.
During economic downturns, defensive sectors like consumer staples perform better, and in bear markets, they tend to lose less than discretionary stocks.
The below chart shows you the sector ratio of the the consumer discretionary vs consumer staples and as you can see this ratio has been breaking down since mid 2018. Meaning money has been rotating from discretionary to staples.
Thus, this is why Campell’s Soup is rising. It has nothing to do with the stock because only 10% of a stock’s price move is tied to the company business results, while 40% of a stock’s price move is tied to the sector it belongs to. So despite the stock price breaching the weekly supply at $44, personally, I’m not a fan of Campbell’s Soup.
This post is my personal opinion. I’m not a financial advisor, this isn’t financial advise. Do your own research before making investment decisions.