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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » The top two reasons to focus on consumer staples

The top two reasons to focus on consumer staples

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VALUEPICK

VALUEPICK
Expert
Expert
http://www.marketwatch.com/story/the-top-two-reasons-to-focus-on-consumer-staples-2014-11-02

The sector recently has been especially favored by top-performing advisers

By
MARK
HULBERT
COLUMNIST

CHAPEL HILL, N.C. (MarketWatch) — There are at least two good reasons to give serious consideration to the consumer-staples sector when choosing stocks to add to your equity portfolio.

TRADING STRATEGIES: NOVEMBER
MarketWatch photo illustration/Getty Images

• Two reasons to focus on consumer staples
• Time has run out for these household names
• Filling up on food stocks
• See full Trading Strategies report for November


The first is that stocks within the sector have received many upgrades in recent sessions from the top performing advisers I monitor.

The second is that the consumer-staples sector historically has tended to be one of the best-performing groups in the months immediately prior to major stock market tops. So the sector would be worth favoring even if you were concerned that a bear market might begin in upcoming months.

Let me start by reviewing the data that support this second point. Those data come from Ned Davis Research, which has ranked the S&P 500 sectors according to their average performance over the three months prior to all bull market tops of the last five decades. That ranking, from best to worst, is:

Consumer Discretionary
Consumer Staples
Health Care
Technology
Industrials
Materials
Telecommunications
Financials
Energy
Utilities
Notice that the consumer-staples sector is second only to the consumer-discretionary sector in relative performance prior to bull-market tops. Assuming the future is like the past, this should provide some solace to investors who both want to participate in this impressively strong stock market, but who are also nervous about a possible bear market.

If these data are insufficient to get you to consider consumer staples, then you should take a look at which sectors have recently received the most upgrades from the top performers. To construct this group of select advisers, I follow the lead of my companion service Hulbert On Markets and focus on just those monitored advisers who have beaten a buy-and-hold in the stock market over the last 15 years. I then restrict this group of market beaters by taking just the 15 with the best returns over the trailing 12 months.

The following table ranks the sectors according to which have received the greatest number of net upgrades over downgrades from these top performers in recent weeks. (Note that the ranking relies on the Dow Jones industrial classification system, which is quite similar, but not identical, to the S&P 500 categorization.)

Industry sector # of net upgrades from top performing advisers
Technology 8
Consumer Goods 7
Health care 5
Financials 3
Consumer Services 2
Basic materials 1
Industrials -1
Telecommunications -1
Utilities -1
Oil & Gas -8
Notice that the Dow Jones Consumer Goods sector is very near the top of the ranking.

One way to invest in the sector, of course, is through an ETF benchmarked to it. One popular one is the Select Sector SPDR—Consumer Staples XLP, -0.25% .

Another might be to favor the stocks within the sector that are currently recommended by at least two of the top-performing advisers. The following seven make this cut:

Archer Daniels Midland ADM, +0.85%
Constellation Brands STZ, +0.65%
Hanesbrands HBI, -1.35%
Lear LEA, +1.00%
Nike NKE, +0.29%
PepsiCo PEP, -0.06%
Tyson Foods TSN, +0.55%

VALUEPICK

VALUEPICK
Expert
Expert
http://www.schwab.com/public/schwab/nn/articles/Consumer-staples-sector

consumer Staples Sector Rating: Outperform
ByBrad Sorensen
- March 26, 2015

The consumer staples sector includes consumer items that tend to be viewed as household necessities. It is composed of food and staples supermarket chains; the food, beverage and tobacco industries; and the household and personal products industries.

The consumer staples sector is considered defensive because companies in this space sell items that will be purchased regardless of the economic environment, such as toilet paper and laundry detergent.

The staples sector has had a bit of a tough run over the last month, but we believe it's a temporary setback. Meanwhile, valuation and sentiment, which had become a little elevated, have settled back to what we view as more reasonable levels. Based on those developments, we are sticking with our current outperform rating.

Lower energy costs should help to bolster profit margins in the sector, which are traditionally quite narrow. Additionally, given concerns over global growth, the increasing possibility of a near-term market correction, and the potential for volatility leading up to a Federal Reserve rate hike, it seems appropriate to have a more neutral overall portfolio position, helped by an increased allocation to the consumer staples sector. Positive factors for the sector include:

Aggressive cost cutting: Consumer staples retailers have aggressively cut costs and are attempting to create more perceived value for consumers, which could support sales.

Lower energy prices: Consumer staples companies typically deal with tight margins, and a reduction in energy prices should help lower the cost side of the equation.

Fluctuating consumer confidence: The sector could benefit from tighter consumer spending if consumer confidence takes an unexpected hit.

With the U.S. economic outlook generally positive, the more defensive consumer staples sector may seem unlikely to garner substantial investor interest. However, given global concerns, we are on the watch for potential deterioration in the U.S. economy. Investors who have gravitated toward the staples group recently may share that mindset.

Negative factors for the consumer staples sector include:

Increased competition: Competition continues to accelerate due to the growth of low-cost, emerging-market production. This could shrink pricing power in the sector by compressing margins and squeezing earnings.

Accommodative monetary policy: Numerous central banks are now firmly in easing mode in an effort to stimulate the economy, which could hurt the more defensive sectors.

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