Certain stocks in the market are not supposed to sell off at any time, and some brands and business models are widely known to be rock-solid and relatively immune to volatility. However, every once in a while, the system throws an unexpected event at these companies, rendering most volatility models useless and leaving most investors holding out for answers.
Today, three retail stocks that might easily pass the argument for being more part of the consumer staples sector have sold off on speculations that the newly appointed head of the United States health department will take a negative stance against fast food brands. Despite being somewhat right about these assumptions, it is clear that these stocks might have overreacted to the news, and that’s where value investors can come into play.
The stocks in question are Coca-Cola Co. (NYSE: KO), PepsiCo Inc. (NASDAQ: PEP), and even global franchise giant McDonald’s Co. (NYSE: MCD). It is shocking, but it is true that all three of these stocks participated briefly in the “everything rally” that followed the days after the United States presidential election, only to give up those gains after the new appointment. Here is why the market might have overdone it and where these names head to from here.
Coca-Cola's Global Moat: How Its International Presence Shields Against Market Selloffs
Even in the unlikely scenario that people cut down on Coca-Cola product consumption, despite whatever health-conscious campaigns are launched, Coca-Cola will still be able to cushion and offset these trends with the global presence it has developed and maintained for decades.
More than that, inflation in the United States, as it has threatened to come back recently, could act as another tailwind for the brand to more than makeup for any fall in sales volume. Why? Because market penetration and brand loyalty will trump any necessary price increase to sustain margins, and not a lot of companies can say that today.
Now that Coca-Cola stock trades at only 85% of its 52-week high, a 15% selloff is enough to get Wall Street’s attention, and here’s what investors can look to confirm this. Analysts at Truist Financial decided to reiterate their “Buy” ratings for Coca-Cola stock, this time coupled with higher valuations.
Where they previously valued the stock at $70 a share, a recent view toward outperformance despite all of today’s implications led them to place a $80 price target on Coca-Cola stock. This target calls for a net upside of up to 27% from where it trades today, not to mention a new all-time high.
PepsiCo Stock Hits a Cyclical Low: Why It's an Unmissable Buy Today
This is another name synonymous with Coca-Cola’s international presence. It has enough diversification in other products like energy drinks and snacks to easily offset any and all downside effects from new health-conscious policies in the United States.
Now trading at 87% of its 52-week high, the price relation to highs is not even the best part of this discount story. PepsiCo stock’s forward P/E of 18.7x would be the lowest valuation over the past six years, beaten only by the COVID-19 pandemic selloffs.
To get back to the normal historical average, PepsiCo stock’s forward P/E would have to expand toward 25.0x, a significant boost from where it sits today and exactly where the source of the potential upside will be coming from for PepsiCo investors.
Investors shouldn’t be surprised to learn that analysts at Bank of America recently kept their “Buy” rating for Pepsi stock while also seeing a fair value for it at $185 a share, which represents a 17% upside from where it trades today. As if all this evidence wasn’t enough, there is one more indicator they should be aware of.
That indicator is institutional buying, especially from State Street, which recently added 5.1% to its PepsiCo positions as of November 2024, netting its holdings at a high of $9.7 billion today, or 4.2% ownership in the company.
McDonald’s Stock: Why This Multi-Billion Giant Offers Rare Double-Digit Upside
It isn’t common to see a company as big as McDonald’s, with a market capitalization of $208 billion today, offers a double-digit upside in the market, but that’s just what Wall Street analysts are betting will happen in the coming quarters.
Specifically, those at Truist Financial now see a $342 valuation for McDonald’s stock after rating it a “Buy” in late October 2024. To prove these analysts right, the stock would have to rally by as much as 18% from where it trades today, not to mention make a new all-time high, to join Coca-Cola’s upside.
It goes without saying that the brand’s penetration in just about every economy in the world, plus its convenience and affordability value proposition, makes the stock an undeniable buy in any and all dips. Even the bears know this, hence why McDonald’s short interest declined by as much as 7.4% during the past month alone, signs of bearish capitulation.
So now, whatever story the market wants to attach to these selloffs, it likely won’t hold in front of all this potential upside and strength, and that is one trend investors could—and should—take advantage of today.