Bernstein Research analyst Ali Dibadj says consumer-staple stocks have outperformed most of the market this year and appear primed to continue rising.
“I think it’s tough to get excited on a fundamental basis about the sector,” Dibadj told Barron’s.
The staples sector has gained 19.9% this year, edging out most other sectors in the top 1,500 universe of stocks and the S&P 500 ’s 19.7%, Barron’s said. The stocks appear to be rising almost entirely due to multiple expansion, or rising price/earnings ratios, rather than forecast earnings growth.
But fundamentals aren’t necessarily driving the stocks, Barron’s said. The sector has long benefited from a flight to safety as investors worry that a downturn is coming or that the bull market will come to an end. The sector is also responding to lower interest rates, which tend to lift dividend-oriented stocks.
“A rate cut would be good for companies like these,” says Dibadj.
The sector is home to large, multinational companies with enormous balance sheets and the financial means to orchestrate growth. Even without rising sales, companies can cut costs, make acquisitions, and buy back shares to boost earnings.
In a tough competitive environment, Dibadj recommends avoiding commodity-oriented stocks and sticking with those that can maintain prices, capture cost savings, or benefit from other growth drivers like innovation or “marketing prowess.”
“There are opportunities for Coca-Cola [KO], PepsiCo [PEP], and Procter & Gamble [PG] to grow EPS in the high single- to low double-digit range,” he says. “Commoditized companies like Clorox [CLX] will be under more pressure.”
Dibadj and his team have outperform ratings: Coca-Cola, PepsiCo, P&G, and Estée Lauder. They also have Buys on Hershey (HSY), Mondelez International (MDLZ), and Tyson Foods (TSN).
They don’t see much opportunity in the cereal aisle, rating Kellogg (K) and General Mills (GIS) underperform. And they see scant upside in other packaged-food stocks, including Conagra Brands (CAG), J.M. Smucker (SJM), and Campbell Soup (CPB), all rated underperform.
To be sure, investors may have a more difficult time in finding signs that companies are on the upswing.
U.S. companies are more negative in their earnings outlooks than they have been in years, setting the advancing U.S. stock market up for a possible letdown as reporting season begins this week, Reuters explained.
In an ominous sign, the ratio of negative to positive guidance from S&P 500 companies for the second quarter is at its highest level since the third quarter of 2016, when companies were just coming out of a four-quarter profit decline, according to IBES data from Refinitiv.
Negative second-quarter outlooks outnumber positive ones by 3.8 to 1, while the average ratio for the prior four quarters is 1.9 to 1.
That pessimism also is reflected in analysts’ second-quarter earnings estimates, which now call for a drop of 0.4% in year over year earnings for S&P 500 companies after gradually declining for weeks, according to Refinitiv data.
With all three major U.S. stock indexes hitting records last week amid increased expectations that the Federal Reserve will cut interest rates this month, some strategists say earnings could disappoint investors unless results are much better than forecast or companies are upbeat about future prospects.
“The bar is clearly higher than it was a month ago given the market’s strength,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.
“There is a need for results to beat and guidance to be positive to continue the upward trajectory in the second half.”
The earnings weakness may temper some of the enthusiasm over rates, strategists at UBS wrote in a note Friday.
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