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 (NYSEARCA:XLP). 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. (NYSE:CHD) topped earnings and revenues expectations in its recently reported quarter. On the other hand, companies like Kraft Heinz Co (NYSE:KHC) and Tyson Foods, Inc. (NYSE:TSN) 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.