This year has tested even the most patient of investors as the price action has been fast and furious through the first several months. Sector rotation has been the name of the game as institutions have shifted portfolios to reflect more defensive positioning. The pockets of the market that performed well during the bullish run over the last several years have reversed course, while new leaders have emerged.
Investors may be tempted to buy some of the beaten down growth stocks whose valuations have come down considerably from last year. While this may be enticing from a long-term perspective, the reality is that no one knows exactly when these stocks will bottom. A much more prudent approach involves identifying which stocks are leading in the current market environment.
After lagging for the better part of last year, the consumer staples sector is the second-best performer (behind energy) in 2022. We want to target areas of the market that are outperforming, and this sector contains many individual companies that are displaying that exact behavior at this very moment. Rather than trying to pick a bottom in names that are in sustained downtrends, buying companies with strong fundamentals that are leading the upside in this market can be a winning strategy this year.
The Consumer Staples Sector SPDR ETF (
XLP Quick Quote XLP - Free Report) is showing resilience through the first few months, in slightly positive territory while the market continues its correction. Many individual constituents within the XLP ETF have broken out to new highs in the past month, serving as another sign of strength. The Consumer Staples Sector SPDR ETF is showing no signs of a topping process. Take a look at the performance of XLP since the bull market beginning in March 2009: Image Source: StockCharts
Many investors that have become accustomed to technology leading the way may be expecting staples to peak shortly, but as we know the crowd is usually wrong. Trends can persist for much longer than most investors would expect, and the XLP ETF may have some more room to run. Prior non-recessionary periods in which the S&P 500 experienced negative returns have tended to coincide with defensive sector outperformance.
We want to maintain maximum flexibility and adjust our approach to what the market is doing. Rather than initiate a knee-jerk reaction, it’s important to keep an open mind about the future. Preparing for a variety of outcomes can help us deal with that uncertain future.
Let’s take a look at a leading consumer staple stock that is also a Zacks Rank #1 (Strong Buy).
MGP Ingredients, Inc. ( MGPI Quick Quote MGPI - Free Report)
MGP Ingredients produces and markets distilled spirits, branded spirits, and food ingredients to the packaged goods industry. MGPI also provides fuel-grade alcohol for blending with gasoline, in addition to distillers feed and corn oil for various other products. The company sells directly to manufacturers as well as through distributors primarily in the U.S., the United Kingdom, Japan, Thailand, Mexico, and Canada. MGP Ingredients was founded in 1941 and is headquartered in Atchison, KS.
MGPI has surpassed earnings estimates in each of the past ten quarters. The company most recently delivered Q1 EPS results earlier this month of $1.69, a 76.04% surprise over the $0.96 consensus estimate. MGPI has posted a trailing four-quarter average earnings surprise of 117.96%, helping the stock advance 54.35% in the past year.