Staples Turn to Shine

The Consumer Staples sector has the second-best sector rank and the second-best revisions ratio for this year, following only the small and incoherent Conglomerates sector. (Incoherent by their very nature of being conglomerates).

This is largely due to Consumer Staples consistently surprising on the upside in the third-quarter earnings season so far. Among the S&P 500 firms in the sector, there have been 16 positive surprises and only 1 disappointment through last Friday’s close.

Not only that, but the sector is actually producing honest to goodness earnings growth. Nothing dramatic mind you, but these companies are seeing positive year-over-year comparisons in distinct contrast to most of the economy. Among the S&P 500 firms, 12 have reported higher earnings than a year ago, while only 5 are lower. Most of the gains, however, have come from better-than-expected margin as there have actually been more disappointments on the top line (7 to 9) than positive surprises. Plus, the majority (5 to 12) have reported lower sales than last year.

While this has been a very successful earnings season for almost all areas of the market, the Staples sector is among the best. For the S&P 500 excluding the Staples, the ratio of positive earnings surprises to disappointments is 5.56:1, which is very strong, but it trails well behind the 16:1 ratio in the Staples sector. Actual earnings growth has been hard to come by outside the Staples sector with a positive growth to negative growth ratio of 0.59, far below the Staples 2.40:1 ratio. (Medical is an exception and has also done well.)

Among the 206 industry groups we rank, the four groups from the Consumer Staples sector are in the top 15. The two most important of these are soft drinks, where all the major players like Coca-Cola (KO - Analyst Report) and PepsiCo (PEP - Analyst Report) are Zacks #2 Rank ("buy") stocks and none of the 17 firms in the industry have ranks worse than a 3. The firms that are Zacks #3 Rank ("hold") are for the most part bottling companies located abroad.

The Cosmetics Industry is also looking good with only one firm with a Zacks Rank worse than 3 and that is a Japanese firm (Kao (KCRPY)). Revlon (REV - Snapshot Report) and Helen of Troy (HELE - Snapshot Report) are standouts with number 1 rankings.

These steady eddie companies have by and large underperformed in the massive stock market rally since March, and look relatively inexpensive. Given there strong estimate momentum they are worth taking a second look at as possible additions to your portfolio. If the economic recovery were to falter, they would be a good place to hide as well.