News of China’s DeepSeek AI chatbot shook the stock market today. While tech stocks plunged on the news, there were some winners.
In fact, investors interpreted the launch of the new generative AI tool as a good reason to rotate into safe stocks like consumer staples. DeepSeek is perceived as a threat to AI stocks like Nvidia, Taiwan Semiconductor, and the rest of the chip sector, which crashed on the news, because it seems to achieve a similar level of proficiency to American peers like ChatGPT, but uses much less power and is much cheaper to run, due in part to being open source.
Among the stocks that were winners on today’s rotation were Conagra Brands (CAG 3.07%), J.M. Smucker (SJM 3.45%), and Kraft Heinz (KHC 3.04%). As of 2:18 p.m. ET, those stocks were up 3.9%, 3.5%, and 3.4%, respectively.
Image source: Getty Images.
Safe stocks are having a moment
Even before the launch of DeepSeek, there was already a good argument that AI stocks and the tech sector in general had run up too far.
Chip stocks have soared in part on strong demand, but also on hopes that the AI revolution will drive even higher levels of demand for these components. However, DeepSeek puts that into doubt.
There wasn’t any company-specific news out today on Conagra, J.M. Smucker, or Kraft Heinz, but all three packaged food companies sell the kinds of products that consumers buy no matter what is happening with the broader economy. They are also unaffected by the prospects of AI or investor bets on the new technology.
All three stocks have also underperformed in recent years. They are flat or down over the last five years, meaning that investors may see value in them during a turbulent time.
Conagra has struggled to grow in recent quarters. The company that owns Birds Eye, Duncan Hines, and Reddi Wip has seen sales declining 0.4% in its most recent quarter.
Although it sells consumer staples, Conagra has still faced challenges amid inflation as consumer spending has been weak and the strong dollar is weighing on international results. Nonetheless, it still forecasts an adjusted operating margin of 14.8% for fiscal 2025, showing that it has sound profit margins thanks to its brand strength, distribution network, and relationships with retailers.
Smucker, which has a strong coffee business along with its namesake jellies and spreads, made a big move acquiring Twinkie maker Hostess over a year ago. But stripping out that move, growth has been pretty slow as well.
Revenue excluding acquisitions, divestitures, and foreign exchange was up 2%, and adjusted gross profit and operating profit margins benefited from the Hostess acquisition. Smucker raised its guidance for earnings per share modestly.
Lastly, Kraft Heinz has been mostly a bust for investors since the merger between the two packaged foods giants was engineered by Warren Buffett, 3G Capital, and others. The company ended up taking a write-down of more than $15 billion on brands like Oscar Mayer, and its portfolio of products seems to be out of favor as some consumers are moving to healthier foods.
In its third quarter, overall revenue fell 2.8%, and it took a $1.4 billion impairment charge on Lunchables and its European business. Revenue continued to fall in all three of the company’s regions, indicating ongoing challenges across the business.
What’s next for these stocks
A one-day rotation isn’t a reason to buy a stock, but investors should be mindful of the impact of the broader market on this sector as investors tend to flock to these companies during times of elevated risk.
For now, it’s unclear if this sell-off is a one-day event or the beginning of a sustained decline, but investors looking to ride out the storm would be mindful to take a look at safe stocks Conagra, Smucker, Kraft Heinz, and their peers.
These companies also tend to be strong dividend payers, giving investors some income even when the stock market is falling.
