The Consumer Staples Reset

For consumer staples, my primary coverage, if you go through the arc of time, you will see that this sector was relatively insulated in a high moat from a lot of external factors. That has broken down and weakened and introduced a lot of volatility over the last 5 to 6 years. It started with Covid. We saw volumes elevated, and when we came out of Covid, you saw a big air pocket. We've had a volumetric recession, if you will, in the sector, and that was temporarily mapped over by having higher pricing on the heels of inflation. Since then, we've seen two things happen that aggravated the stocks set up for staples. One, you saw relative earnings momentum break against them, led by huge new bull markets such as AI. The second piece of that I would say, is pressure in the middle of the P&L. That's really been the source of the introduction of tariffs and more recently, the Iran war.”

In the context of a tougher staples backdrop, I've really focused and prioritized my research process and framework to picking winners for clients. In that, I focus primarily on asset quality, idiosyncratic revenue drivers, positive earnings revision and capital allocation

In my role as a global team lead, I spend a lot of time with the rest of my team on a weekly and daily basis, conversing about the key investment debates impacting the stocks and subsectors within the global consumer industry subset. As part of this, you get pattern recognition from across the Atlantic and the Pacific to really hone in on what the most dislocated ideas are.

A few weeks ago, I published a deep dive on the energy drink sector. Periodically, I find it helpful for a senior investor to re-underwrite their existing views on a key topic for their sector. For energy drinks specifically, the category is now mainstreaming. This is really a function of two dynamics. Number one, there's a higher heightened need for caffeine and consumers are also looking for newer products with different nutritional profiles and low sugar content. Energy drinks is meeting that needs state. If you look abroad and index the energy drink categories household penetration to that of other nations, you can see that it's still in its nascency outside of the US. And within the US, the runway is also very great when you benchmark energy drinks relative to more mature beverage categories such as coffee, soda or juices. For these reasons, I maintain a positive view for the energy drink sector over the long term.