As the earnings season picks up pace, investors seem to be happy with the way the quarter has progressed. The reported figures show stark improvement from the preceding quarter’s reports. At present, sectors including finance, technology, industrials, basic materials and business services look promising and are delivering improved growth. Interestingly, the pace of growth is expected to persist in the second quarter as well. Hence, investors need to replenish their portfolio with stocks that are likely to trump estimates this season.
In today’s discussion, we are focusing on the Consumer Staple sector, which is placed at bottom 25% of the Zacks Classified sectors (12 out of 16). We note that the sector has gained 7.6% so far in the year and has outperformed the S&P 500 index that advanced 7.0%.
Factors Affecting the Sector
Lower oil prices and reducing unemployment rate along with a resurgent housing market, hint that the economy is on a recovery mode. Domestic economic progress and a boost in infrastructure spending under Trump’s administration bode well for the sector.
U.S. consumer confidence, which had increased sharply in February and March, declined in April due to less optimism in labor market. Despite April’s decline, we expect consumers to remain confident regarding the economy in the near term. This positive sentiment is hence likely to translate into higher consumer spending.
However, we cannot escape the fact that many consumer staples stocks are still suffering from continued pressure in the face of foreign exchange headwinds, competitive pressure, food deflation, sluggish growth in the emerging markets, declining unit volumes and other global issues, which could limit growth. Despite the uncertainties, the Consumer Staple sector still holds some promise, given the favorable economic indicators.
The Season So Far
On summarizing the performance of the 358 S&P 500 members that reported financial results as of May 3, we see that total earnings of these companies were up 12.9% on a year-over-year basis (74.3% of the companies beat EPS estimates) while total revenue increased 7.9% (65.9% beat top-line expectations).
Per the Zacks Earnings Preview, overall first-quarter earnings for the S&P 500 companies are anticipated to be up 11.9% from the year-ago quarter on 6.2% rise in revenues.
About 62.5% of the S&P 500 companies in the Consumer Staple sector have reported their results, wherein 65.0% beat earnings estimates, while 25.0% surpassed revenues estimates. While earnings rose 3.8% year over year, revenues inched up 0.1%. The Consumer Staples stocks appear to be struggling in terms of revenue beating estimates. Notably, Consumer Staples is currently the last of all 16 Zacks sectors, probably due to a difficult sales environment. According to the report, the sector is expected to record top-line growth of 4.0% and is likely to witness earnings growth of 4.2% this season.
A Guideline to Make Prudent Choices
Though we know that the Consumer Staple sector has not been an outstanding performer and thus identifying winners is definitely a herculean task in such a scenario. Given the numerous stocks in the sector that almost always muddle one’s stock-picking prowess, the Zacks methodology could offer some relief.
Our research shows that stocks with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP have the chance of a positive earnings surprise as high as 70%. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
We have identified five consumer staple stocks which not only have strong fundamentals but are also likely to report solid quarterly numbers despite the sector’s underperformance.
5 Solid Choices
Laurel, MI-based Sanderson Farms, Inc. (SAFM - Free Report) can be an attractive stock for investors. This poultry processing company has a Zacks Rank #3 and an Earnings ESP of +1.86%. The Zacks Consensus Estimate for the second quarter of fiscal 2017 is $2.69 per share. The company posted an average positive earnings surprise of 15.83% over the trailing four quarters and is expected to report results on May 25.
We also suggest investing in Tyson Foods, Inc. (TSN - Free Report) , the world's largest fully-integrated producer, processor and marketer of chicken and poultry-based food products. Based in Springdale, AR, Tyson Foods currently carries a Zacks Rank #2 and has an Earnings ESP of +3.77%. You can see the complete list of today’s Zacks #1 Rank stocks here. The Zacks Consensus Estimate for the second quarter of fiscal 2017 (ending March) is pegged at $1.06 per share. The company posted an average positive earnings surprise of 6.79% over the trailing four quarters and has a long-term earnings growth rate of 11.00%. The company is scheduled to report results on May 8.
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 #3 and has an Earnings ESP of +5.88%. The Zacks Consensus Estimate for the first quarter of 2017 is 17 cents a share. The Dallas, TX-based company delivered an average positive earnings surprise of 2.14% over the trailing four quarters and has a long-term earnings growth rate of 11.5%. The company is slated to report results on May 9.
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 has an Earnings ESP of +2.86% and a Zacks Rank #2. The company delivered an average negative earnings surprise of 7.44% over the trailing four quarters. The Zacks Consensus Estimate for the first quarter of 2017 is pegged at 35 cents per share. The company is expected to report results on May 9.
We also suggest investing in Coty, Inc. (COTY - Free Report) , a manufacturer and marketer of beauty products worldwide. Based in New York, Coty carries a Zacks Rank #3 and has an Earnings ESP of +25.0%. The Zacks Consensus Estimate for the third quarter of fiscal 2017 earnings is 12 cents a share and has delivered an average positive earnings surprise of 11.77% over the trailing four quarters. The stock has a long-term earnings growth rate of 9.52%. The company is scheduled to report results on May 10.
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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