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Popular as an abode of defensive stocks, the Consumer Staples sector mainly comprises companies that provide essentials and products used in daily lives. Including companies that sell food, beverages, soap and cleaning materials and products related to beauty and personal care among others, the sector is one of the most trusted even when economic conditions are not congenial. Thus, adding stocks from this basket usually lends more stability to investors’ portfolio.

Now with the economy looking more stable, the Consumer Staples sector is well poised to reap the benefits. Moreover, the sector remains a lucrative space for income-seeking investors, given its strong dividend yield and growth rate.

U.S. Economy: The Picture Looks Good

The overall economy appears to be in good shape, driven by an improved labor market, higher consumer spending, rising consumer confidence and increased business investments. This is quite evident from the latest GDP data, which suggests that the U.S. economy improved at a better-than-expected rate in the third quarter. Per the Bureau of Economic Analysis, the third and final estimate for third-quarter GDP jumped at an annual rate of 3.2%.

Notably, the labor market remains attractive with a gradual decline in unemployment rate. The unemployment rate has gone down significantly to 4.1% in November from 4.8% in January. All these factors have been driving consumer stocks higher, despite disruptions as a result of hurricanes.

Also, the underlying strength in the U.S. economy paved the way for a rate hike for the third time this year. The Fed raised its benchmark target by 0.25 points to a range of 1.25 to 1.50, leaving the doors open for three more hikes in 2018. These factors have backed the rise in the major indices this year so far, with the S&P 500, Nasdaq and Dow Jones rallying roughly 19.9%, 15.6% and 25.3%, respectively.

Status of Consumer Staples at a Glance

Courtesy of the favorable economic conditions, consumer-driven companies appear well placed for the New Year. Additionally, Trump’s latest tax policy is likely to provide a big push to consumer goods companies.

Apart from these factors, the sector should continue to gain from focus on innovation, product launches and strategic buyouts. However, many companies in the consumer staples space garner significant revenues from emerging markets. While some emerging markets are witnessing improved trends, exchange rate volatility and other global risks remain threats. Moreover, responsiveness to rising consumer preference for organic products remains a challenge as it creates competitive pressure, price wars and a high promotional environment, thereby posing threats to margins.

Additionally, greater marketing and R&D costs, along with volatile input prices remains a concern. Nonetheless, the companies are undertaking aggressive efforts to keep pace with shifting consumer patterns. In this regard, the sector players remain committed to adopting the e-commerce mantra, alongside adding organic products to their portfolios. Given all pros and cons, let’s see how the Consumer Staples sector is placed.

Consumer Staples Sector a Mixed Bag

While the Zacks Consumer Staples sector has advanced approximately 14.9% on a year-to-date basis, it has underperformed the S&P 500 that surged 22.9% in the same timeframe. Looking at the sector’s trailing 12-month price-to-earnings (P/E) ratio, which is one of the most reliable multiple to value consumer staples stocks, it looks pretty overvalued when compared with the S&P 500. The sector has a trailing 12-month P/E ratio of 24.8, which is in line with the median level.

However, this space compares unfavorably with the market at large, as the trailing 12-month P/E for the S&P 500 is 21.5 while the median level is 20.1. The Consumer Staples sector’s stretched valuation shows that there is only little upside left for the space when compared with the S&P 500 market index. Also, the group’s Zacks Sector Rank of #14 (out of 16), which places it at the bottom 13% of the Zacks Rank sectors, confirms this view.

Zacks Industry Rank – Positive

Within the Zacks Industry classification, Consumer Staples is one of the 16 Zacks sectors, which is further sub-divided into 16 industries at the expanded (or “X”) level – Publishing - Periodicals, Textile - Apparel, Food - Meat Products, Funeral Services, Publishing - Books, Food – Dairy Products, Publishing -Newspapers, Food - Confectionery, Beverages - Alcohol, Food - Miscellaneous, Soap and Cleaning Materials, Agriculture - Operations, Tobacco, Beverages - Soft Drinks, Consumer Products - Staplesand Cosmetics.

We rank all the 250-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies. We put our industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). Over the last 10 years, using a one week rebalance, the top half beat the bottom half by more than twice as much. To learn more visit: About Zacks Industry Rank.

The Zacks Industry Rank is #26 for Publishing  - Periodicals (top 10%), #34 for Funeral Services (top 13%), #40 for Textile - Apparel (top 16%), #45 for Publishing - Books (top 18%), #72 for Food - Meat Products (top 28%), #118 for Food - Dairy Products (top 46%), Beverages - Alcohol (top 46%), Publishing - Newspapers (top 46%), Soap and Cleaning Materials (top 46%) and Food Confectionery (top 46%), #198 for Food - Miscellaneous (bottom 23%), #207 for Tobacco (bottom 19%), #212 for Agriculture - Operations (bottom 17%),  #215 for Beverages - Soft Drinks (bottom 16%),  #217 for Consumer Products - Staples (bottom 15%) and #222 for Cosmetics (bottom 13%).

On analyzing the Zacks Industry Rank for the constituent industries in this space, it is apparent that the overall outlook for the Consumer Staples sector is close to Positive.

Sector Level Earnings Trends

While a handful of companies have reported earnings, the Q4 earnings season still has nearly a month before it reaches peak output. Of the 16 Zacks sectors, 13 are expected to witness positive earnings growth, with Consumer Staples being one of them.

Total Q4 earnings for the sector are expected to be up 4.2% on a 2.5% increase in revenues. This will follow 3.9% earnings growth and 1.9% revenue upside registered in third-quarter 2017. For more details on earnings of this sector and others, please read our Earnings Preview report.

Consumer Staples Stocks Worth Buying Right Now

The optimistic picture for the sector might push consumer staples stocks higher. While the hurdles looming over the space should not be overlooked, one can consider buying stocks that carry a favorable Zacks Rank. Here are few stocks you may want to consider:

Brown-Forman Corporation (BF.B - Free Report) : This Zacks Rank #2 (Buy) stock has rallied about 53% this year so far. The stock’s earnings estimates for the current fiscal year have been revised roughly 2.1% upward over the last 30 days.

The Estee Lauder Companies Inc. (EL - Free Report) : This Zacks Rank #2 stock has gained 69.3% year to date. Earnings estimates for the current fiscal year have been revised upward by 2 cents over the last 30 days.

Ollie's Bargain Outlet Holdings, Inc. (OLLI - Free Report) : A 1.7% upward revision in earnings estimates for the current fiscal year over the past 30 days led to a Zacks Rank #2 for this stock. The stock has surged 87% so far this year.

John Wiley & Sons, Inc. (JW.A - Free Report) : This Zacks Rank #2 stock has gained more than 23% this year so far. Earnings estimates for the current fiscal year have been revised nearly 6.4% upward over the last 30 days.

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