The consumer staples sector has been performing well of late. Lower oil prices and declining unemployment along with a resurgent housing market suggest that the economy is on a recovery mode. Domestic economic progress and a boost in infrastructure spending under President Trump’s administration bode well for the sector.
Consumer confidence – a key determinant of the economy’s health – had increased sharply in February and March. However, it declined in April due to less optimism in the labor market. Despite the 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, which accounts for more than two-thirds of U.S. economic growth.
While estimates for GDP growth increased marginally by 0.7% in the first quarter 2017, overall growth for the year is expected to improve from last year. GDP is expected to increase 2.3% in 2017 compared with 1.9% last year. The recent improvement in financial conditions is expected to contribute to the upside.
This above-trend pace will further tighten the labor market, with solid job growth expected in the coming months. That will help bump up inflation to 2% or higher over the next two years.
This is also evident from the 6.4% year-to-date (through May 16, 2017) rally in the Consumer Staples Select Sector SPDR ETF (XLP - Free Report) . Year to date, shares of Consumer Staples sector were up 9.1%, compared with the S&P 500’s 7.5% gain.
These factors signal at growth in the economy, which will boost consumer spending – a key driver for the staples sector. However, a few disruptive trends are likely to persist, which in turn are expected to influence investment approach. Headwinds like unfavorable currency, food deflation, declining volumes, potential price wars, a competitive environment, slowdown in international markets and other global issues have been hindering the sector.
Nevertheless, the economy is rebounding and investors seem to be happy with the way the quarter has shaped up till now. For the 458 S&P 500 companies that have reported Q1 results, as of May 17, 72.3% have beaten estimates, while 65.9% exceeded the same, as per Earnings Trends report. The reported figures show a stark improvement from the preceding quarter. At present, sectors like energy, finance, technology, industrials, basic materials look promising. Interestingly, the pace of growth is likely to be maintained in the second quarter as well.
Few consumer staples stocks in the S&P 500 cohort like Church & Dwight Company, Inc. (CHD - Free Report) topped earnings and revenues expectations in its recently reported quarter. On the other hand, companies like The Kraft Heinz Company (KHC - Free Report) and Tyson Foods, Inc. (TSN - Free Report) lagged their earnings and revenues estimates.
The Winning Strategy
Improved consumers’ confidence and definite signs of near-term economic recovery are making the consumer staples sector attractive. However, picking the right stocks may prove to be quite daunting task.
With the help of our new style score system, we have shortlisted three consumer staple stocks that have excellent prospects and hold immense growth potential. Our Growth Style Score condenses all the essential metrics from a company’s financial statements to get a true sense of the quality and sustainability of growth. Our research shows that stocks with Growth Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 (Buy) offer the best investment opportunities in the growth investing space.
All the stocks selected herein flaunt a Zacks Rank #1 or 2, with a Growth Style Score of ‘A’ and have the potential to ride out the impending volatility.
3 Prominent Picks
Aramark (ARMK - Free Report)
Investors can count on Aramark, which provides food, facilities, and uniform services in North America and internationally. This company has a market cap of more than $9 billion, beta of as low as 0.50 and a long-term growth rate of 12.80%. The company not only has an impressive earnings surprise history over the past four quarters but has also posted an average surprise of 4.45%.
Positive estimate revisions for fiscal 2017 and fiscal 2018 over the past 30 days also instill confidence among investors. This Philadelphia, PA-based company can be a perfect fit for investors’ portfolio, armed with a Growth score of ‘A’ and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Further, Aramark’s stock price history reveals that the company hasn’t been a disappointment in a long time. In fact, on a year-to-date basis, the stock has rallied 2.4%, outperforming the Zacks categorized Food-Miscellaneous/Diversified industry, which declined 1.6%.
British American Tobacco p.l.c. (BTI - Free Report)
We recommend investing in British American, which engages in the production and sale of tobacco products. This London, U.K-based company has been witnessing positive estimate revisions for 2017 and 2018 over the past 30 days. This Zacks Rank #2 stock has a long-term earnings growth rate of 10.63% and a Growth Score of ‘A.’
Looking into the stock price history, we note that British American shares have gained 24.9% on a year-to-date basis, outperforming the Zacks categorized Tobacco industry, which showcased growth of 15.1%.
Ollie's Bargain Outlet Holdings, Inc. (OLLI - Free Report)
Based in Harrisburg, PA, Ollie's Bargain Outlet Holdings has delivered an average positive earnings surprise of 16.80% in all the trailing four quarters. Further, estimates of this merchandise retailer are rising since the past 60 days and are expected to witness earnings growth of 17.9% in fiscal 2017 and 14.9% in fiscal 2018.
Further, the stock has rallied 39.4% on a year-to-date basis, outperforming the Zacks categorized Consumer Products-Miscellaneous Staples industry, which showcased growth of 11.7%.
With a Growth Score of ‘A,’ beta of 0.13, long-term earnings growth rate of 17.14% and an attractive Zacks Rank #1, this stock is a hot pick for investors.
Intelligently selecting stocks for investments greatly benefits 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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