Consumer Staples Tumbles: 5 Stocks Still Worth Buying

The consumer staples sector, which has been performing well over the past few months buoyed by rising consumer confidence and improving economy, fell 0.9% yesterday. The disappointing ISM manufacturing and services indexes readings and soft jobs data in August may have triggered the decline which also left investors pondering about the economy’s recovery.

Factors Leading to the Dip

Per 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.

The release of the Federal Reserve's Beige Book, which is a key indicator of the U.S. economic health and a critical tool for the Fed in decision making, also unnerved investors about a possible rate hike in September.

The Beige Book indicated moderate wage growth in the coming months, one of the key conditions set by the Fed for considering an interest rate hike, raising concerns among investors, thereby leading to a decline in the consumer staples index.

While uncertainty over the timing of the rate hike still persists and investors should wait for the central bank policy meetings, we know for sure that such worries are short-lived and the economy remains stable despite the recent trend of disappointing data.

Economy Remains Stable

According to comments from San Francisco Fed President John Williams, the economy is doing well and the employment level will improve next year. He said that unemployment is likely to drop from the current level of 4.9% to 4.5% next year. Williams also believes that inflation will achieve the Fed’s target of 2% within the next two years.

Fed Vice Chairman Stanley Fisher is also optimistic about the state of the economy. Fisher said that the labor market was extremely close to full employment levels.

Lower gas prices and strong labor market also helped increase household wealth, which eventually boosted consumer spending.

Consumer Confidence Surges

Consumer confidence – a key determinant of the economy’s health – surged during the month of August, indicating that the economy is on the recovery path after a dismal show during the first half of the year.

In August, consumer confidence surged to its highest level in 11 months. The consumer confidence index increased 4.4 points to 101.1, well above the expected level of 97.4. Additionally, the expectations index increased to 86.4, but remained below the highest level achieved since the end of the 2008 recession.

Buildup of Bullish Data

Housing data released in August was also encouraging owing to favorable durable goods and industrial production. The only 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.

Despite sluggish GDP, household consumption increased on an annualized basis of 4.4%, higher than the rate of 4.2% estimated earlier.

Hence, there is enough evidence that the economic picture may rebound in the third quarter, owing to improved residential construction and strong labor market conditions.

The Winning Strategy

Investing in the consumer staples stocks is safe because of their defensive nature. Surging consumer confidence and indications that the economy is poised to grow stronger in the second half of the year, is also making the consumer staples sector attractive. In fact, consumer staples stocks have the potential to face headwinds from Brexit aftershocks, the Federal Reserve’s still pending decision over the rate hike, currency headwinds 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.

This is where our VGM score comes in. 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 winners. However, 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 stocks based on a VGM Score of ‘A’ combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy).

These stocks certainly have bright prospects to ride out the impending volatility.

5 Prominent 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.

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.

The stock has a VGM Score of ‘A’, beta of 0.26 and long-term earnings growth rate of 11%. 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.

Sysco Corporation (NYSE:SYY)

We recommend investing in packaged food company, Sysco. This Houston, TX-based packaged food company has delivered an average positive surprise of 8.32% in the trailing four quarters. It is expected to witness earnings growth of 10.24% in fiscal 2017 and 12.40% in fiscal 2018.

Sysco’s sales have improved consistently, driven by acquisitions and volume growth. The company’s efforts to boost sales and margins are bearing fruit, as it delivered positive gross margins in the last five consecutive quarters, after persistent declines in the last two fiscal years.

This Zacks Rank #2 stock has a long-term earnings growth rate of 8.60%, beta of 0.56 and a VGM score of ‘A’.

US Foods Holding Corp. (NYSE:USFD)

Rosemont, Ill-based US Foods is a foodservice distributor with a Zacks Rank #2 and a VGM Score of ‘A’.

The company posted a positive earnings surprise of 5% 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 VGM score of “A” and sports a Zacks Rank #1. It delivered an average positive earnings surprise of 25% over the trailing four quarters.

Elizabeth Arden, Inc. (NASDAQ:RDEN)

Based in Pembroke Pines, FL, Elizabeth Arden carries a Zacks Rank #2 and a VGM Score of ‘A’. It manufactures and sells beauty products in the U.S. and internationally.

The company has delivered an average positive surprise in the last two consecutive quarters. It is expected to witness earnings growth of 52.40% in fiscal 2017 and 116.81% in fiscal 2018.

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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