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Time to Shop for Undervalued Consumer Goods Stocks as Confidence Rises?

Mary-Lynn Cesar, Kapitall: Increasing confidence among consumers inspired us to find undervalued consumer goods stocks. 

Consumer confidence in the US rose in January, continuing December’s rebound after three consecutive months of decline this past fall. The Conference Board Consumer Confidence index rose to 80.7 this month, up from 77.5 in December.

Read more from Kapitall: 2 Bellwether Stocks to Watch as Macro Headwinds Weigh on Markets

Each month, Nielsen conducts a Consumer Confidence Survey for the Conference Board in which respondents share their views of current business conditions. In January, survey participants provided the following assessments:

  • Business conditions are good: 21.5% vs. 20.2% in December

  • Business conditions are bad: 22.8% vs. 23.2% in December

  • Jobs are plentiful: 12.7% vs.11.9% in December

  • Jobs are hard to get: 32.6% vs. 32.9% in December

Meanwhile, the percentage of people expecting business conditions to improve over the next six months was 17.4%, the same number reported in December’s survey. On a more positive note, fewer people expected business conditions to worsen, declining to 12.1% from December’s 13.9%.

Investing ideas

As consumers continue to view their economic situation in a positive light, they're more inclined to spend money. The latest consumer confidence reading inspired us to look for investment opportunities among consumer goods stocks.

Starting with stocks belonging to the consumer goods sector, we screened for undervalued stocks as indicated by a price to free cash flow (P/FCF) ratio below 15. Free cash flow is the cash that remains after subtracting expenses, taxes, and short-term and long-term investments, and adding back non-cash items to the cash a company generates from its operations (operating cash flow). The P/FCF ratio compares a company's annual free cash flow to its price. 

Generally, companies with a low P/FCF ratio are trading at a price that doesn't properly reflect the FCF that the firm is generating. We then ran another valuation screen to find stocks are seriously undervalued, this time looking for those with a price/earnings to growth (PEG) ratio below 1. This ratio incorporates market expectations of a company’s future earnings into its calculations. 

For a final screen, we looked through the remaining group of stocks for those with a healthy return on equity (ROE) greater than the industry average. ROE measures a firm's profitability by expressing a company's profits as a percentage of shareholder equity.

We were left with six consumer goods stocks on our list.

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