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3 Valuable Consumer Staples Picks for Investors Right Now

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The consumer staples sector has been performing well of late buoyed by rising consumer confidence and improving economy. Strong recovery in the housing market and an improving labor market played a crucial role in boosting buyers’ confidence. Encouraging manufacturing index readings issued by the Institute of Supply Management (ISM) also hints at a pickup in GDP, indicating that economy is in good shape currently.

Drivers Indicating Improvement in Economy

Consumer confidence improved moderately in June, with the Consumer Confidence Index up from May’s reading of 117.6 to 118.9 in June. Steady job additions and persistently low unemployment have helped the household wealth to increase. This in turn, boosted consumer spending.

The recent hike of its benchmark interest rate by a quarter point by Federal Reserve reiterates the fact that the economy is doing well. Further, the Fed indicated that it anticipates the next hike in December, along with three more in the coming year, which signals rising consumer confidence as well as the U.S. economy’s growth.

The fresh data from ISM’s manufacturing index also hit a record level in June which increased from 54.9 to 57.8, its highest level since Aug 2014. It is also significantly higher than the estimated level of 55.1. This reflects improvement across most sectors. The report also reveals that a strong uptick in demand has taken place, which is why it would be a smart move to pick stocks from the consumer staple sector, which is well positioned to benefit from this stellar reading on confidence level.

Sector’s Correlation with the Economy

The Consumer Staple sector, which is at the top 38% of the Zacks Sector Rank (6 out of 16), also holds some promise, given the favorable economic indicators. We note that since past six months, the sector has registered an increase of 8.71%, higher than the S&P 500 that is up 7.44%.

The rebound in oil prices from all-time lows, improving employment scenario and a gradual improvement in the housing market signal that the economy is on a recovery mode.

The Winning Strategy

Surging consumer confidence and indications of a stronger economy in the second half of the year make the consumer staples sector attractive. Investing in consumer staples stocks is safer because of their defensive nature. However, picking winning stocks is not an easy task.

With the help of our new style score system, we have identified three consumer staples stocks that have excellent prospects and are good bets for value investors.

Our Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

To arrive at the best value picks, we have shortlisted consumer staple stocks that have a Zacks Rank #1 or 2 with a Value Style Score of ‘A’.

3 Prominent Picks

Aramark (ARMK - Free Report)

Headquartered in Philadelphia, PA, Aramark carries a Zacks Rank #2 along with a Value Score of ‘A’. The company offers food services, facilities management, uniform and career apparel to health care institutions, universities, school districts, stadiums and businesses.

The Zacks Consensus Estimate for Aramark has increased 2.3% for fiscal 2017 and improved 2.0% for fiscal 2018 over the last 60 days. Further, the stock has a long-term earnings growth rate of 12.00% and beta of 0.50. Though the company’s forward P/E multiple is higher than the industry and S&P, the stock has strong fundamentals. Aramark has been delivering strong, broad-based productivity improvements in North America and International base accounts. It has also been reinvesting in technology and capabilities. The provider of food, facilities and uniform services has delivered positive earnings surprises in six out of the seven consecutive quarters, along with in-line results in the remaining one. It has also posted positive sales surprise in four of the seven consecutive quarters.

Aramark’s shares have moved up 17.9% in the last six months significantly outpacing the Zacks categorized Food-Miscellaneous Diversified industry’s 3.9% decline.

Sanderson Farms, Inc.

Headquartered in Laurel, MS, Sanderson Farms is one of the largest poultry producers in the U.S. It is engaged in the production, processing, marketing and distribution of fresh and frozen chicken products.

The company has a Value score of ‘A’ and sports a Zacks Rank #1. It delivered an average positive earnings surprise of 8.53% over the trailing four quarters. Further, the stock has a low beta of 0.59. It possesses a forward P/E of 11.53x, lower than the industry average of 13.80x and S&P average of 18.60x.

Sanderson Farms’ shares have moved up 21.5% in the last six months significantly outpacing the Zacks categorized Food-Meat Products industry’s gain of 0.8%.

SUPERVALU, Inc.

SUPERVALU is one of the nation's largest supermarket retailer and largest food distributor. We note that this grocery dealer does not have a good track record of financial performance. The company’s earnings have lagged the Zacks Consensus Estimate in two of the trailing four quarters, with an average miss of 6.7%. Moreover, its sales have lagged the consensus mark in six of the seven straight quarters. In fact, SUPERVALU’s shares have underperformed the Zacks categorized Food-Miscellaneous Diversified industry in the last six months. During the said time frame, shares of this company plunged 30.9% compared to the industry’s decline of 4.8%. 

Nevertheless, SUPERVALU is taking measures to turn around in its performance. In fact, the company is taking initiatives to expand its retail banners in order to boost sales. We commend its decision to spin off its Save-A-Lot stores as this would help the company to concentrate on its more profitable core businesses. Moreover, it has undertaken several measures to improve comps in the retail sector and increase operating efficiency.

Estimates have increased for 2017 over the last 30 days. Further, it is expected to witness earnings growth of 18.97% in 2017. It possesses a forward P/E of 9.45x, lower than the S&P average of 18.60x. With a Value Score of ‘A’ and an attractive Zacks Rank #2, this stock is a hot pick for investors.

Bottom Line

An intelligent selection of stocks greatly benefit investors. The abovementioned stocks can prove to be valuable additions to your portfolio.

You can also use the Zacks Stock Screener to find other stocks with this winning combination. Your search ends at stocks with a favorable Zacks Rank of either #1 or 2, which encompasses its strong fundamentals, promises price movement and highlights analysts’ constructive view on the same via positive estimate revisions. As we know, a sturdy portfolio always gives favorable returns.

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