We recently published a list of the 12 Best Household Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where The Honest Company, Inc. (NASDAQ:HNST) stands against the other best household stocks to buy according to hedge funds.

Is There a Softening in the Consumer Staple Sector?

On March 21, Bryan Spillane, Bank of America Securities’ senior food and beverage analyst, appeared on CNBC’s ‘The Exchange’ to discuss things across his space and the trends surrounding consumer staples. He said that going through the first quarter of the year and having check-ins with companies has led him to conclude that the conditions in the sector have been soft, which is true across his entire coverage universe. Consumers are pulling back a bit, and there’s uncertainty surrounding the conditions in the sector. What’s surprising is that these trends started in January and extended through the first quarter.

The sector, however, is showing a dichotomy. Spillane believed this is a market for consumer staples, as we are looking for defensiveness and certainty. But at the same time, we are doing that at a time when the fundamentals appear to be decelerating. This creates a dynamic for investors to really understand the market and where it would be best to put their money in, as not all seem as safe as they would typically be.

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The Biggest Challenge in Consumer Staples

According to Spillane, the biggest challenges right now are in the beverage alcohol sector specifically, which dropped off unexpectedly in the first quarter of this year after a weak fourth quarter last year. This can be attributed to visa issues, as cohorts of consumers are not spending as much as before. Similar trends are now materializing in household products and personal care categories as well. While these sectors have been very resilient over the past three years, they are now beginning to show signs of a slowdown. The conditions are a head-scratcher, because these are the products consumers use every day. Thus, general uncertainty around a cohort of consumers, including visa holders and students, is beginning to materialize in the sector’s performance.

These trends have resulted in concerns about whether staples would be less of a safe haven this time around. Addressing these concerns, Spillane said that staples would still be a safe haven if we consider them relative to the world we are living in. Large liquid consumer staples are still a place investors would want to be if they are looking for a place to hide in uncertainty, as they are likely to generate considerable cash flows and pay dividends.

Our Methodology

We sifted through stock screeners, financial media reports, and ETFs to compile a list of 20 household stocks. We then selected the top 12 with the highest number of hedge fund holders, as of Q4 2024, and ranked them in ascending order. We sourced the hedge fund sentiment data from Insider Monkey’s database.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).

The Honest Company, Inc. (NASDAQ:HNST)

Number of Hedge Fund Holders: 25

The Honest Company, Inc. (NASDAQ:HNST) is a personal and household care company that provides non-toxic natural products, including home cleaning, diapers, health and wellness products, wipes, bath products, and skincare. It operates as an omnichannel brand that offers products through digital and retail channels. The company’s three product categories include household and wellness, diapers and wipes, and skin and personal care.

The Honest Company, Inc. (NASDAQ:HNST) reported positive results in 2024, hitting record revenue, gross margins, and adjusted EBITDA. It reported a revenue of $378 million, reflecting a 10% year-over-year growth. Its gross margins expanded 900 basis points to 38%. This was the highest annual revenue and gross margin ever for the company. It also delivered its first full year of positive adjusted EBITDA as a public company. The primary driver of this growth was its wipes category, which attained the No. 1 market position in natural wipes. The Honest Company, Inc. (NASDAQ:HNST) is continuing a strategic focus on its wipes, which is yielding promising results, driving repeat purchases, and expanding distribution.

In addition, the company is planning a significant strategic pivot by gradually moving away from its direct-to-consumer fulfillment operations to focus on more profitable retail and digital partnerships. With $75 million in cash and zero debt, The Honest Company, Inc. (NASDAQ:HNST) is in a solid position to continue its transformation strategy, which is why analysts are bullish on the stock. Its median price target of $5.02 implies an upside of 44.42% from current levels. In a report released on March 10, Aaron Grey from Alliance Global Partners maintained a Buy rating on the company with a price target of $8.00.

Meridian Contrarian Fund also expressed bullish sentiments for the stock, and stated the following regarding The Honest Company, Inc. (NASDAQ:HNST) in its Q4 2024 investor letter:

“The Honest Company, Inc. (NASDAQ:HNST) is a consumer products company focused on developing natural baby-care consumables, cosmetics, soaps, and other household supplies. The company went public in 2021, bolstered by pandemic-driven demand for its cleaning products. However, subsequent global supply chain challenges created headwinds for the smaller company, presenting a contrarian investment opportunity. We view the Honest brand as an authentic differentiator that has demonstrated growth despite operational challenges that previously impacted its earnings potential.

The company’s outperformance during the quarter and throughout 2024 was driven by sustained sales growth and notable improvements in gross margins, marking its first profitable year on an adjusted EBITDA basis. As Honest expands its product offerings in beauty categories aligned with consumer preferences for cleanly formulated skincare products—a segment we believe the company is well-positioned to succeed in—we remain optimistic about its long-term prospects. While we reduced our net shares held following the strong performance in the quarter, we maintain conviction in its growth potential.”

Overall, HNST ranks 12th on our list of the best household stocks to buy according to hedge funds. While we acknowledge the potential of HNST as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than HNST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.