The consumer staples sector has been performing well over the past few months buoyed by rising consumer confidence and improving economy. Strong recovery in the housing market and an improving labor market played a crucial role in raising buyers’ confidence. Cheaper gasoline prices have also increased household wealth, which eventually boosted consumer spending.
However, August turned out to be a dismal month, weighed down bydisappointing ISM manufacturing and services index readings and soft jobs data. Further, uncertainty over the timing of the interest rate hike by the U.S. Federal Reserve remains another major cause of concern.
Performance in August
Per The Wall Street Journal, the U.S. factory sector showed contraction in August, highlighting manufacturers’ struggles and a broader drag on the economy from weak business spending and an uncertain global outlook. The U.S. service-sector index also sank to its lowest level in August in more than six years. Additionally, the U.S. economy created a total of 151,000 jobs in August, considerably lower than the consensus estimate of 179,000.
Another disappointment was the Department of Commerce’s second estimate for second-quarter GDP. Though GDP growth of 1.1% in the second quarter improved from first-quarter’s 0.8% growth, it was down a tenth of a percent from the initial reading.
However, despite sluggish GDP, household consumption increased 4.4% on an annualized basis, higher than 4.2% estimated earlier.
Hence, there is enough evidence that the economic picture may improve in the third quarter and the worries are short-lived.
The Winning Strategy
Surging consumer confidence and indications of a stronger economy in the second half of the year make the consumer staples sector attractive. Investing in consumer staples stocks is safer because of their defensive nature. In fact, consumer staple stocks have the potential to counter headwinds from Brexit aftershocks, the Federal Reserve’s still pending decision over the rate hike, impact of currency fluctuations and other global growth issues.
This is why it may be a good idea to pick consumer-related stocks at this point. However, picking winning stocks may prove to be difficult.
With the help of our new style score system, we have identified four consumer staples stocks that have excellent prospects and are good bets for value investors.
Our Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
To arrive at the best value picks, we have shortlisted consumer staple stocks that have a Zacks Rank #1 or #2 with a Value Style Score of ‘A’.
The Picks
Tyson Foods, Inc. (NYSE:TSN)
Springdale, AR-based Tyson Foods is the world's largest fully-integrated producer, processor and marketer of chicken and poultry-based food products. The company offers a wide array of meat products and enhances its portfolio through innovation and acquisitions. Its sales-boosting initiatives and strong international presence are also appealing.
Tyson has a Zacks Rank #2 with a Value Score “A” and it trades at a forward P/E (price-to-earnings) of 16.25x, which is favorable compared with the S&P average of 17.80x.
The company has delivered an average positive earnings surprise of 12.24% in three out of the trailing four quarters. It is expected to witness earnings growth of 43.33% in fiscal 2016 and 6.76% in fiscal 2017.
US Foods Holding Corp. (NYSE:USFD)
Rosemont, Ill-based US Foods is a foodservice distributor with a Zacks Rank #2 and a Value Score of ‘A’.
It possesses a forward P/E of 16.38x, lower than the industry average of 22.30x and S&P average of 17.80x.
The company posted a positive earnings surprise of 5% in the recently reported second-quarter 2016 results and has a long-term EPS growth rate of 18.59%.
Sanderson Farms, Inc. (NASDAQ:SAFM)
Headquartered in Laurel, MS, Sanderson Farms is one of the largest poultry producers in the U.S. It is engaged in the production, processing, marketing and distribution of fresh and frozen chicken products.
The company has a Value score of “A” and sports a Zacks Rank #1. It delivered an average positive earnings surprise of 25% over the trailing four quarters.
It possesses a forward P/E of 13.11x, lower than the industry average of 15.80x and S&P average of 17.80x.
Lee Enterprises, Inc. (NYSE:LEE)
Lee Enterprises is a premier publisher of local news, information and advertising in primarily midsize markets. It carries a Zacks Rank #2 along with a Value Score “A”.
It possesses a forward P/E of 7.07x, lower than the S&P average of 17.80x. Further, for fiscal year 2016, earnings per share are estimated to grow 4.65%.
Bottom Line
An intelligent selection of stocks greatly benefits investors. 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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TYSON FOODS A (TSN): Free Stock Analysis Report
SANDERSON FARMS (SAFM): Free Stock Analysis Report
LEE ENTRPRS (LEE): Free Stock Analysis Report
US FOODS HLDG (USFD): Free Stock Analysis Report
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