The New Consumer Staples

Investor perception of what makes certain businesses or industries better than others is shaped over many decades and takes a long time to change. In general, highly predictable and profitable businesses with global expansion opportunities are considered the best bet. This is contingent on them not being overly expensive. These companies were predominantly consumer staples and healthcare stocks, earning them the moniker Quality (or Growth) at a Reasonable Price (QARP).

An investor’s return fundamentally depends on the underlying business’s ability to grow its per-share value and return money to shareholders, multiplied by the investor’s willingness to pay more or less per unit of income. Many positive surprises lead to a higher price, while many negative surprises often push it lower.

After 2008, many successful and famous managers still thought that making toilet paper and owning soda bottling plants was better than creating apps for ordering cabs or streaming music.

Founded in 1965, PepsiCo is expected to generate $7.8 billion in free cash flow by 2025, earning a 15.75% return on each dollar invested in the business. PepsiCo is expected to increase its revenue by about 2% per year for the next few years. You would need to pay $236 billion to purchase the entire company.

Founded in 2009, Uber is expected to generate $8.5 billion in free cash flow by 2025 while earning a 35.9% return on capital. The company is expected to increase its revenues by 14% annually for the next few years, and it would cost only $195 billion to purchase the entire business.

It took Pepsi 60 years to achieve what Uber did in just 15. It’s interesting that you still must pay 32% more for a slower-growing, less profitable business.

This is not an isolated example, either. Both the consumer staples and healthcare stock indexes peaked in profitability in the early 2000s and have declined since. This contrasts with the information technology sector, which is currently the most profitable sector and is still showing signs of improvement.

Over the 20-year period ending in 2027, the MSCI World Index is expected to increase its total earnings per share by 219%. The consumer staples sector grew slightly faster at 225%, while the information technology sector grew by 738%. Some of the new staples are online marketplaces, music and video streaming, and ride hailing. While the consumer has figured out what some of their new staples are, investors are still trying to keep up.

A comparison of the Return on Equity of the Consumer Staples, IT and Healthcare sub-indexes vs. the Return on Equity of the total MSCI World Index

Source: Bloomberg