After the Brexit referendum, which shook the global economy in Jun 2016, investors have become jittery and are resorting to safe haven stocks. In this scenario, the consumer staples sector appears to be quite reliable.
Overall, the sector has reported modest results this quarter. Lower gas prices, an improving job scenario and increasing consumer confidence have been supporting the improvement in results.
Improving home sales, stepped-up economic activities, higher business and government spending and a buildup in inventories have boosted U.S. economic growth. While gradual improvement in the macro-economic scenario will act as a growth driver, decreasing commodity costs will also help improve profit margins for certain staples companies.
Though lower crude oil prices are leading to worries related to global deflation and an economic slowdown, subsiding oil and natural gas prices mean that consumers are left with more disposable income. A rise in wages has also increased household wealth and boosted consumer spending. We expect these positive sentiments to translate into higher consumer spending in 2016.
However, there are many consumer staple stocks, which are still suffering from continued pressure in the face of limited consumer spending, foreign exchange headwinds, declining unit volumes and other global issues. Continued appreciation of the U.S. dollar relative to most foreign currencies has become a serious headwind to the earnings of U.S.-based staples companies with significant international operations like Kimberly-Clark Corporation (KMB), Mondelez International, Inc. (MDLZ), The Procter & Gamble Co. (PG), Altria Group, Inc. (MO), ConAgra Foods, Inc. (CAG) and General Mills, Inc. (GIS).
In such an investment climate, we have identified five stocks, which not only have strong fundamentals but are also likely to report solid quarterly numbers. So it’s better to grab these retail stocks now before they start touching new highs after their results.The Way to Pick the Right Stocks
Obviously, there are quite a few companies in the consumer staples space, so it may be difficult to pick the right stocks for your portfolio. One way to narrow down the list of choices is by looking at stocks with a favorable Zacks Rank of #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP
Earnings ESP is our proprietary methodology to determine which stocks have the best chance to surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of positive earnings surprise is as high as 70%.5 Prominent Choices
You may bet on Dean Foods Company
, which processes and distributes milk, and other dairy and dairy case products in the United States. The stock carries a Zacks Rank #1 and has an Earnings ESP of +2.56%. The Zacks Consensus Estimate for the second quarter of 2016 stands at 38 cents a share. This Dallas, TX-based company delivered an average positive earnings surprise of 17.81% over the trailing four quarters and has a long-term earnings growth rate of 12.00%. The company is slated to report results on Aug 8.
Investors can also count on Inter Parfums Inc.
(IPAR - Free Report
) , which is a worldwide provider of prestige perfumes and mass market perfumes and cosmetics. The stock holds a Zacks Rank #1 and has an Earnings ESP of +5.26%. The Zacks Consensus Estimate for the second quarter of 2016 stands at 19 cents a share.
The company registered an average negative earnings surprise of 5.37% over the trailing four quarters, and has a long-term earnings growth rate of 15.00%. The company is expected to report results on Aug 9.
We also suggest investing in food manufacturer B&G Foods, Inc.
(BGS - Free Report
) . Based in Parsippany, NJ, B&G Foods carries a Zacks Rank #1 and has an Earnings ESP of +1.92%. The Zacks Consensus Estimate for the third quarter of 2016 stands at 52 cents a share. The stock has a long-term earnings growth rate of 10.25%. The company is expected to report results on Oct 25.
Orrville, OH -based The J. M. Smucker Co.
(SJM - Free Report
) can also be an attractive stock for investors. This food and beverage company has a Zacks Rank #1 and an Earnings ESP of +4.07%. The Zacks Consensus Estimate for the second quarter of 2016 stands at $1.72 a share. The stock has a long-term earnings growth rate of 8.36%. The company is expected to report results on Aug 25.
Another beverage company that can add value to the portfolio is Constellation Brands Inc.
(STZ - Free Report
) . The company registered an average positive earnings surprise of 8.89% over the trailing four quarters. Currently, it has a Zacks Rank #2 and an Earnings ESP of +0.60%. The Zacks Consensus Estimate for the second quarter of fiscal 2017 stands at $1.66 a share. The stock has a long-term earnings growth rate of 16.34%. The company is expected to report results on Oct 5.Bottom Line
We believe that investing in these companies, which have an earnings beat potential, should yield strong returns for your portfolio in the short term.
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