The consumer staples sector has been on a roller coaster ride of late. This has put risk-averse investors in a fix as to where to park their investments in such a scenario.
Looking at the third quarter earnings season, which has just ended, we note that while there were many consumer staple stocks which had put up a strong performance, many others suffered due to a volatile macroeconomic environment.
A host of factors have been plaguing the global economy. Headwinds like unfavorable currency, food deflation, declining volumes, potential price wars, a competitive environment, slowdown in international markets and other global issues adversely impacted the consumer staple stocks in the quarter.
The decline in consumer confidence – a key determinant of the economy’s health – in October also hurt the investors’ sentiments. The probable interest rate hike by the U.S. Federal Reserve in December has further spurred market volatility and unnerved investors.
Stocks to Avoid
Given this backdrop, this may be the right time for investors to reshuffle their portfolio and consider avoiding these consumer staple stocks, which are not capable of delivering desired returns. These stocks have delivered sluggish results in their recently reported third quarter and continue to expect weakness in the near term.
Dull Third-Quarter Results
Some consumer staple stocks that were hit hard after their last quarterly earnings release included Treehouse Foods, Inc. THS, Inventure Foods, Inc. SNAK, Kimberly-Clark Corp. KMB and Craft Brew Alliance, Inc. BREW.
On Nov 3, Treehouse Foods reported weaker-than-expected third-quarter 2016 earnings and revenues and lowered its earnings guidance for the full year. This Zacks Rank #5 (Strong Sell) stock has tumbled 19.9% since then, in comparison to the Zacks categorized Food-Miscellaneous/Diversified Market industry’s 1.65% slip.
The company anticipates the overall food industry to be sluggish and full-year revenues for the industry to be flat. Moreover, foreign exchange headwinds will continue to challenge margins. Estimates have also been declining for full year 2016 and 2017 over the past 30-days period.
Kimberly-Clark reported lower-than-expected earnings and revenues in the third quarter of 2016 results, in stark contrast with stellar results in the preceding quarter. This consumer product giant further lowered its 2016 guidance for earnings and organic sales.
Kimberly-Clark has been witnessing slackness in organic sales over the past few quarters. Also, currency volatility and higher marketing expenses remain matters of concern for the company. This Zacks Rank #4 (Sell) stock has slumped 9.18% on a year-to-date basis.
Additionally, it has underperformed the Zacks Categorized Consumer Products-Miscellaneous Staples industry, which slipped 2.11%. In addition, the stock has been witnessing negative estimate revisions over the past 60 days for the current quarter and full year 2016 and 2017.
Inventure Foods reported lower-than-expected earnings and revenues in the third quarter of 2016. Further, Inventure has seen negative earnings estimate revisions for the current quarter and the current year. A Zacks Rank #5 further confirms weakness in Inventure.
Another stock which performed dismally was Craft Brew. On Nov 3, the company reported softer-than-expected earnings and revenues in the third quarter of 2016 results, which led to a 9.5% decline in the share price. Moreover, Craft Brew holds a Zacks Rank #5 and has been witnessing negative earnings estimate revisions for the current quarter and the current year over the past 30 days.
Economy Stable Ahead
Despite a slight decline in October, consumer confidence made an impressive turnaround in November, in the process hitting a nine-year high. According to The Conference Board, the Consumer Confidence Index increased to 107.1 in November, touching its highest since Jul 2007.
The Present Situation and Expectations Indices were also up 7.2 and 5.7 points from October to 130.3 and 91.7 in November, respectively. This indicates that the Presidential election could not dampen consumer spending. In fact, analysts believe that the market anticipates Trump's policies to spur growth and stimulate the economy in the form of tax cuts and reinvestments into sectors like defense and infrastructure.
That’s why it may be a good idea to invest in consumer-related stocks at this juncture, as they are considered a “safe” option because of the sector’s inherent defensive nature. Surging consumer confidence and definite signs of near-term economic recovery is making the consumer staple sector attractive. However, picking the winning stocks may prove to be quite difficult.
This is where our VGM score comes into play. Here “V” stands for Value, “G” for Growth and “M” for Momentum, and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select the sure winners. But it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following two stocks based on their VGM Score of ‘A’ combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy). These stocks also have positive estimates revision and their share prices are trending higher than the industry average.
2 Prominent Picks
Dean Foods Company DF
Dallas-based Dean Foods Company processes and distributes milk, and other dairy and dairy case products in the U.S. The company posted impressive third-quarter 2016 results last month, wherein earnings matched estimates and sales surpassed the same. The quarter also witnessed the highest volume growth in four years. Further, management issued a robust outlook for the fourth quarter, anticipating this trend to continue.
The stock has increased a significant 8.7% over the past 30 days. Additionally, it has outperformed the Zacks Categorized Food Market industry’s 3.53% drop. This shows that despite industry-wide weakness caused by food cost deflation, Dean Foods is performing really well. Estimates have also been rising for the stock over the past 30 days.
This food and beverage company has delivered an average positive earnings surprise of 5.44% in the trailing four quarters, having beaten estimates thrice. The stock has a VGM Score of ‘A,’ a beta of 0.20 and a long-term earnings growth rate of 12%. Moreover, its attractive Zacks Rank #1 makes it a hot pick for investors. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ingredion Inc. INGR
We recommend investing in Ingredion, which manufactures and sells starches and sweeteners to various industries. This Westchester, IL-based company reported better-than-expected results in the third quarter of 2016. It has delivered an average positive surprise of 10.47% in the trailing four quarters. It is expected to witness earnings growth of 20.07% in 2017 and 8.50% in 2018.
The stock has surged 22.47% on a year-to-date basis. Additionally, it has outperformed the Zacks Categorized Food-Miscellaneous/Diversified Market industry’s 5.83% gain. Estimates have also been rising for the stock over the past 30 days.
This Zacks Rank #2 stock has a long-term earnings growth rate of 11.00%, a beta of 0.78 and a VGM score of ‘A,’ which makes it attractive.
An intelligent selection of stocks greatly benefits investors And 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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