Sector Analysis: Consumer Staples versus Discretionary in 2018

Discussing the YTD performance

After delivering a strong performance in 2017, the consumer staples and consumer discretionary sectors have moved in opposite directions this year. While consumer discretionary stocks have done fairly well, consumer staples stocks have been crushed.

Consumer staples sector

The S&P 500 consumer staples index, which includes 33 companies, has fallen ~11% YTD (year-to-date) as of June 12. The S&P 500 consumer staples index is the worst-performing S&P 500 sector. The S&P 500 Index (SPY) has risen ~4% YTD.

Sector Analysis: Consumer Staples versus Discretionary in 2018

All but seven companies in the S&P 500 consumer staples index have delivered negative returns. Coty (COTY), Campbell Soup (CPB), and General Mills (GIS) are among the biggest losses. They have fallen 29%, 27.6%, and 25%, respectively.

On the other side of the spectrum are Dr. Pepper Snapple Group (DPS) (+24%), Estee Lauder Companies (EL) (+21%), and Archer Daniels Midland (ADM) (+13.5%). While the news of a merger with Keurig Green Mountain in early January drove Dr. Pepper Snapple’s stock price higher, a consistent financial performance has been behind Estee Lauder’s stock momentum. Estee Lauder hasn’t missed Wall Street analysts’ top and bottom-line expectations in the past five quarters.

Consumer discretionary is among the top sectors this year

The consumer discretionary sector is the second-best performer in the S&P 500 Index this year. The technology sector is first with 14% returns. So far, the consumer discretionary sector has gained 12.2%.

In 2018, 48 of the 81 S&P 500 consumer discretionary stocks are in the green. Netflix (NFLX) (+88%), Under Armour (UAA) (+67%), and TripAdvisor (TRIP) (+65%) are among the top gainers.

Behind the strength in Netflix stock are some optimistic top and bottom-line expectations. Netflix’s revenue and profits are expected to increase 38% and 129%, respectively, this year. The company is trading at a one-year forward earnings multiple of 107x, which indicates that investors are willing to pay a premium for growth.

L Brands (LB) (-39%), DISH Network (DISH) (-32%), and Mohawk Industries (MHK) (-22%) are among the lowest consumer discretionary stocks. L Brands has been struggling amid intense competition and changing customer tastes. L Brands’ EPS is projected to fall 8% in the next 12 months.