Why Dollar General, PepsiCo, and The Hershey Company Plunged Today

Shares of food and essentials companies Dollar General (NYSE: DG), PepsiCo (NASDAQ: PEP), and The Hershey Company (NYSE: HSY) all fell on Wednesday, down 5.4%, 2.9%, and 4%, respectively, as of 2:45 p.m. ET.

The across-the-board declines in these consumer staples names can likely be attributed to the House of Representatives passing its budget reconciliation bill last night. While the bill still has to go through committee meetings and also pass the Senate, analysts believe there's a high probability of cuts to Medicaid and the Supplemental Nutrition Assistance Program (SNAP) on the horizon. These programs help lower-income families pay for medical care and food. Therefore, cuts to these programs could affect sales for the three companies, which serve that demographic.

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Budget resolution preserves tax cuts, aims to cut spending

Last night, the Republican-controlled House of Representatives passed a budget resolution by a narrow 217-215 vote, with all Democrats and one Republican dissenting. It wasn't clear the resolution would pass, but a late push from President Donald Trump apparently flipped holdouts to "yes" votes.

The resolution preserves the Tax Cuts and Jobs Act of 2017 and makes room for new ones, with outlined tax breaks amounting to $4.5 trillion over a decade. Offsetting that is a loose plan for $2 trillion in spending cuts.

The spending cuts appear to be the focus of investors in these stocks today. While specific cuts are not outlined in the resolution, the bill instructs the committees that deal with various federal programs to cut their spending by a certain amount. The committee that handles Medicaid and SNAP is the Energy and Commerce committee, which is directed to make the biggest cuts of all, totaling $880 billion.

Trump has promised not to cut funding for Social Security and Medicare for seniors, so most analysts believe there will have to be cuts to Medicaid and SNAP benefits for the poor in order to meet the spending stipulation in the bill.

Cutting Medicaid and SNAP would likely further pressure the finances of lower-income families, and could therefore decrease purchase volumes for these three stocks. Dollar General, of note, gets about 60% of its sales from families making less than $30,000 per year. Earlier this year, CEO Todd Vasos noted Dollar General had seen spending wane toward the end of each month. His conclusion was that even though Dollar General mostly sells "essentials" like cereal, milk, eggs, and other household items, families nevertheless bought less as their monthly budgets ran out, due to inflation and other pressures.

And of course, pressure on working families could also lead to lower purchases of branded foods from Pepsi or Hershey. While Pepsi is known for its namesake soda brand, it actually sells lots of healthier food as well, including Aquafina water, Quaker Oats oatmeal, and Lay's potato chips, among many others. While Hershey's portfolio consists mostly of candy, it also sells healthier chips, protein bars, and mints. If Medicaid and SNAP benefits are cut, consumers may buy fewer of these items or "trade down" to lower-cost private-label items.

Investors should beware of austerity measures

It should be noted that this budget resolution is not the final bill, and there are likely changes that will be made. House committees will hold weeks of meetings to iron out the details, the final bill will then need to pass the House, and will then have to go to the Senate, where further changes will be made. Moreover, cuts to Medicaid and SNAP benefits are not specifically named in this resolution, as some lawmakers have pointed out.

Still, with certain categories of spending declared off-limits, most analysts believe cuts to programs that benefit lower-income Americans are inevitable.

While many are in favor of tax cuts and cutting government spending as a general concept, investors should also be aware that austerity measures can be a drag on economic growth. While investors should take a wait-and-see approach to what actually passes through Congress, the past week's consumer sentiment surveys have been very poor, suggesting slowing economic growth could be on the horizon.

Republicans counter that lower taxes and deregulation will enable the economy to grow at a faster pace, offsetting the drag from lower spending. That is certainly possible, but is also a point of debate among economists.

Regardless, consumer product companies like these three that sell to lower- and middle-income Americans may find an adverse economic environment over the next year, at least.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Hershey. The Motley Fool has a disclosure policy.