The consumer staples sector has been weak since quite some time, making risk-averse investors jittery. Headwinds like unfavorable currency, food deflation, declining volumes, potential price wars, a competitive environment, slowdown in international markets and other global issues have been plaguing the companies in the sector.
While many consumer staple stocks put up a strong performance in the third quarter earnings season, others suffered due to a volatile macroeconomic environment.
Consumer staple stocks that were hit hard after their last quarterly earnings release include Treehouse Foods, Inc. (THS), Inventure Foods Inc (SNAK), Kimberly-Clark Corp (KMB) and Craft Brew Alliance Inc (BREW). All these companies reported softer-than-expected earnings and revenues in the third quarter.
Nevertheless, the economy is picking up steam with inflation gradually edging toward the desired 2% target and the job market gaining strength. According to the recent Conference Board data, the Consumer Confidence Index rose to 107.1 in November from October’s upward revised reading of 100.8, and is at its highest level in nine years. The second estimate for GDP shows that the U.S. economy grew 3.2% in the third quarter, faring better than the first estimate of 2.9% growth and an anemic increase of 1.4% in the second quarter.
Per the Labor Department, the economy added 178,000 jobs in November, significantly higher than the revised figure of 142,000 for October. The job additions were in line with expectations even as the unemployment rate declined more than expected, from 4.9% to 4.6% in November.
Given an improving labor market and the gradual rise in wages, we expect consumer spending to improve. This shows that the environment is much conducive now and Fed officials may look for a rate hike this December.
The Winning Strategy
Surging consumer confidence and definite signs of near-term economic recovery are making the consumer staples sector attractive. However, picking the winning stocks may prove to be quite difficult.
With the help of our new style score system, we have shortlisted five 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 its growth. Our research shows that stocks with Growth Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) 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.
Consumer Staples Stocks with Strong Growth Prospects: Lancaster Colony Corp. (LANC)
We recommend investing in Lancaster Colony Corp. (LANC) which manufactures and markets specialty food products for the retail and foodservice markets in the United States. This Columbus, OH-based food company has delivered an average positive surprise of 8.6% in the trailing four quarters. It is expected to witness earnings growth of 7.3% in fiscal 2017 and 3.5% in fiscal 2018.
This Zacks Rank #2 stock has a long-term earnings growth rate of 3%, beta of 0.84 and a Growth Score of ‘A.’
Further, Lancaster Colony’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 risen 16.1%, outperforming the Zacks categorized Food-Miscellaneous/Diversified industry, which showcased growth of just 2.6%.
Consumer Staples Stocks with Strong Growth Prospects: Hormel Foods Corp (HRL)
Austin, MN-based Hormel Foods Corp (HRL) is a multinational manufacturer and marketer of consumer-branded meat and food products. Strong consumers’ loyalty toward popular brands such as Skippy, Spam, Applegate deli meats and Hormel Bacon is expected to boost Hormel Foods’ sales in the quarters ahead. Also, the company’s productive marketing strategies are likely to tap wider market demand in the near term.
The company has delivered an average positive earnings surprise of 6.3% in three out of the trailing four quarters. It is expected to witness earnings growth of 3.5% in fiscal 2017. Further, Hormel Foods’ estimates are rising since the past 30 days and its margins are better than other companies in the space like Tyson Foods, Inc. (TSN) and Sanderson Farms, Inc. (SAFM).
Further, HRL has risen 27.7% over the last two years, outperforming the Zacks categorized Food-Meat Products Market industry, which showcased growth of 10.2%.
With a Growth Score of ‘A,’ beta of 0.46, long-term earnings growth rate of 10.4% and an attractive Zacks Rank #2, this stock is a hot pick for investors.
Consumer Staples Stocks with Strong Growth Prospects: Blue Buffalo Pet Products Inc (BUFF)
Wilton, CT-based Blue Buffalo Pet Products Inc (BUFF) operates as a pet food company in the United States, Canada, Japan, and Mexico. It holds a Zacks Rank #2 and has a Growth Score of ‘A.’
Though the company has a high beta of 2.08, it has an attractive long-term EPS growth rate of 15.5%. Further, it has delivered an average positive surprise of 10.4% over the past four straight quarters. It is expected to witness earnings growth of 27.4% in 2016 and 12.5% in 2017.
On a year-to-date basis, the stock returned 27.9%, outperforming the Zacks categorized Consumer Products-Miscellaneous Staples industry, which slipped 4.65%.
Consumer Staples Stocks with Strong Growth Prospects: Tate & Lyle PLC (ADR) (TATYY)
UK-based Tate & Lyle PLC (ADR) (TATYY) provides ingredients and solutions to the food, beverage, and other industries in the United Kingdom, the United States, other European countries, and internationally. The stock carries a Zacks Rank #2 and has a Growth Score of ‘A.’
The company is expected to witness earnings growth of 12% in fiscal 2017 and 10.7% in fiscal 2018. It targets a long-term EPS growth rate of 16.5% and has a beta of 0.21.
The stock carries a forward P/E ratio of 14.7 compared to the sub-Industry P/E ratio of 21.6. The stock is underpriced now and there is scope for further appreciation.
Consumer Staples Stocks with Strong Growth Prospects: Wolters Kluwer (ADR) (WTKWY)
Based in Netherlands, Wolters Kluwer (ADR) (WTKWY) carries a Zacks Rank #2 and a Growth Score of ‘A.’ It provides information, software, and services in Europe, North America, the Asia Pacific, and internationally.
Though the company has a high beta of 1.21, its long-term EPS growth rate is 6.8%. Further, it is expected to witness earnings growth of 7.6% in 2016 and 7.3% in 2017.
This stock is also underpriced now, as it carries a lower forward P/E ratio of 15.1 compared with the sub-Industry P/E ratio of 21.7. Further, the stock has outperformed the Zacks Categorized Consumer Staples Market Sector on a year-to-date basis, as the stock’s return was 5.13% in comparison to the sector’s negative return of 1.12%.
Intelligently selecting stocks for investments greatly benefits investors. The above-mentioned 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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