How Waffles Explain the Global Economy

Bear Market, Growth Stocks, Macroeconomics

The Rules for the Global Economy Have Changed

Did you hear who’s doing a brisk business thanks to the coronavirus pandemic?

I don’t mean Amazon, Walmart, or Zoom, even though they’ve all seen big benefits thanks to social distancing and stay-at-home orders. Instead, I’m talking about a product much closer to my heart.

Eggo Waffles!

No, I’m not kidding. Kellogg, the owner of Eggo, said that waffle sales soared 45% in March. That’s amazing growth.

This comes on the heels of Conagra saying that Chef Boyardee is as hot as it’s ever been.

I didn’t see the waffle boomlet coming, yet it makes perfect sense. Folks are eating breakfast at home and Eggo is a pretty easy option. It’s the ultimate comfort food in a time of widespread discomfort. Same for Beefaroni.

I’m not here to talk about waffles. Rather, I use Eggo as an example of a larger trend that we’re seeing. The entire global economy is built on certain assumptions. If you expect sales of, say, one million units, and instead, you get sales of 0.7 million, well… that throws the entire game out of balance.

You now have 0.3 million of whatever you’re trying to sell just sitting around collecting dust. You need to store it or slash prices. It’s just that simple. Furthermore, all your suppliers are going to feel the squeeze. Multiply these problems countless times across the entire economy and before you know it, no one has toilet paper and crude oil is free. It sounds crazy, yet here we are.

Of course, the economy will rebalance itself soon. In fact, it’s already starting. One thing I can tell is that if there’s a way to make a profit, somebody will find a way to do it, and do it fast.

What Defensive Stocks Can Do for You

When times get tough for the economy, you want to make sure you own plenty of defensive stocks. What do I mean by “defensive”?

These are stocks whose fortunes aren’t so closely tied to the economy’s cycle. Homebuilders, for example, are classic cyclical stocks. When times are good, home sales take off. But when times are rough, home sales nearly come to a complete halt. It’s either boom or bust; there’s not much in between. The real talent of a successful homebuilder is lasting though these cycles.

Defensive stocks are the opposite. These companies usually make consumer staples, meaning products that folks will buy no matter what.

One of my favorite consumer staples stocks is Church & Dwight (CHD). They own several well-known brands like Arm & Hammer, OxiClean, and Trojan. C&D also makes Nair depilatory products, First Response pregnancy tests, Orajel toothpaste, L’il Critters and SpinBrush toothbrushes.

Check out the long-term performance of Church & Dwight. Since 2000, the stock is up more than 900% while the S&P 500 is up 91%. Frankly, it’s hard to see how you can go wrong selling baking soda and condoms.

I’ll give you a good example of how a defensive stock can serve your portfolio. Between January 9 and March 18 of this year, the S&P 500 fell over 26%. This was during some of the worst times of the COVID-19 panic. The virus was spreading quickly and no one knew what to do.

During that same stretch, not only did shares of Church & Dwight not plunge, but they actually gained a little ground. There weren’t many stocks that rallied while everyone else was scared.

Now we’re in earnings season. This is the equivalent of Judgement Day for stocks. It’s when we learn who has been raking in profits and who has been lagging the pack. Last week, Church & Dwight said it made 83 cents per share for Q1, beating Wall Street’s consensus by six cents. Previously, the company had told us to expect 73 cents per share, so they’re even running ahead of their own plans.

But here’s what caught my attention. Church & Dwight says it benefited from the coronavirus outbreak, especially brands like Arm & Hammer and some hygiene products.

This is directly from the earnings release:

First quarter net sales grew 11.5% to $1,165.2 million. The Company experienced a significant increase in consumer demand for many of its products in response to the COVID-19 virus in March, including VITAFUSION gummy vitamins, ARM & HAMMER SIMPLY SALINE and STERIMAR nasal hygiene products, ARM & HAMMER baking soda, ARM & HAMMER and XTRA laundry detergent, ARM & HAMMER cat litter, and KABOOM bathroom cleaners.

Gummy vitamins and cat litter? With first-quarter sales at almost $1.17 billion, the numbers don’t lie.

Church & Dwight is a solid blue-chip defensive stock that’s poised to prosper in good times and bad. Earlier this year, the company hiked its dividend for the 24th year in a row. Church & Dwight is a strong buy in uncertain times.

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