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3 Consumer Defensive Stocks Delivering Tech-Like Returns

Wednesday, April 14, 2021 | MarketBeat Staff
3 Consumer Defensive Stocks Delivering Tech-Like Returns

In the world of professional sports, defense often wins championships. In stock investing, defensive companies typically don't produce championship caliber returns. This role is usually best left for cyclical, high-growth stocks.

Sometimes, however, the tables are turned, and the defense goes on offense. This is exactly what is happening for a handful of companies across the food distribution, discount retail, and education industries.

Here are three of those so-called defensive names that are up big this year—and may still be in the early innings of a bigger rally.

Why is United Natural Stock Up So Much?

After climbing 82% last year, United Natural Foods (NYSE:UNFI) is up another 131% year-to-date. North America's leading natural, organic, and specialty food distributor is suddenly firing on all cylinders after shedding more than 80% of its market value from 2018 to 2019.

Since United Natural delivers to a wide range of health-focused and traditional grocers, it has had ample opportunity to benefit from consumer stockpiling and home eating habits during the pandemic. This along with the acquisition of SUPERVALU has led to some strong sales and erased bad memories of anemic growth, supply chain snags, and competitive pressures.

There is still more work to be done on the bottom line which has remained in the red, but the market is hoping a return to profitability is not far away. The private brand's side of the business where margins are higher is becoming a bigger part of the mix. United Natural is also becoming more efficient and lowering costs by adding new distribution centers and securing more favorable terms with suppliers.

Better yet, according to the technical analysis, there may be more mileage to the food distributor's remarkable rally. On April 12h, a symmetrical continuation triangle formed with the stock trading around $36. If the bullish pattern plays out as forecast, United Natural could reach the mid $40's by next month.

Will Big Lots Stock Keep Going Up?

Discount retailer Big Lots (NYSE:BIG) has been generating some big-time returns for investors. After gaining almost 50% in 2020, the stock is already up 58% year-to-date and seemingly setting new record highs every week.

Last quarter Big Lots recorded 7.9% comparable-store sales growth, a figure even big box retailers like Costco would find enviable. Homebound consumers are hungry for a lot of things these days including a good bargain. Enter Big Lots' vast selection of closeout merchandise from furniture and housewares to personal care items and electronics. And while store traffic has been limited, Big Lots' online storefront has been booming thanks to enhanced pickup and delivery options.

Where does Big Lots go from here? Based on its valuation it could go even higher. The stock is trading around 9x forward earnings which despite the huge run is still below the five-year average multiple. On a trailing P/E basis the stock is also dirt cheap at 4x.

Although the big gains have been made, Big Lots' stock could certainly trend higher if it can continue to perform like it has and strengthen its balance sheet. Big Lots long-term debt balance of $36 million is a fraction of what it was a year ago. This has supported an ability to pay dividends and repurchase shares. And with more than $300 million left on the current buyback program, any dips in the stock could prompt management to swoop in and keep this big rally going.

What is a Good Education Stock?

From retail to the education side of the consumer defensive sector, Stride (NYSE:LRN) has also been a hot stock in 2021. Already up 51%, the country's largest online provider of K-12 learning has piqued the interest of investors due to the prevalence of online learning during COVID-19 and the likelihood that hybrid education models are adopted across the U.S.

Stride's web-based platform and services have booked steady enrollment growth over the years even prior to COVID-19. This has led to 11% annualized revenue growth over the last five years. The best years may be yet to come, however as school systems migrate to online and blended education.

Outside of the K-12 learning market, Stride is also pursuing growth avenues in the career education space in tapping into a separate $65 billion addressable market that is almost twice the size as its core market. The foray into adult learning is getting investors excited because profit margins are about twice that of the K-12 market.

Of course, much of the rally in Stride stock has been driven by the Biden Administration's $1.9 billion relief package of which $123 billion is earmarked for elementary and secondary education. While much of this relief funding will go towards creating safe, in-person classroom environments, some will likely be spent on enhancing schools' online learning capabilities.

An increased national focus on education infrastructure should continue to benefit companies like Stride even in the post-pandemic world. School administrators and home-schooling parents alike will want to be better equipped to handle the next crisis. This on top of the expansion opportunities in career learning should serve as a solid one-two punch for earnings growth and allow Stride investors to take more gains in stride.

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Big Lots (BIG)2.0$63.60-4.8%1.89%4.05Hold$55.44
United Natural Foods (UNFI)1.2$34.75-0.8%N/A18.29Hold$25.67
Stride (LRN)2.0$26.65-1.6%N/A22.97Buy$44.25
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