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Consumer Staples Stocks: Separating the Wheat from the Chaff

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Sector performance disappoints

If we were to rate the sectors that investors and Wall Street were down on the most in the first half of 2018, consumer staples would surely find a high rank among them.

The Consumer Staples Select Sector SPDR ETF (XLP) fell 9.4% in the first six months of 2018 as shares of the majority of companies, including industry heavyweights Procter & Gamble (PG), Kimberly-Clark (KMB), Walmart (WMT), General Mills (GIS), the Kraft Heinz Company (KHC), and Philip Morris International (PM), marked double-digit falls.

Consumer Staples stocks, which are best known for their defensive nature, are losing their sheen as disruptions from the expansion of Amazon (AMZN), the rise of private label products, and the inflation in raw materials and logistics costs are taking a toll on their financial performances.

Besides growing price competition and cost pressures, a shift in the buying and consumption patterns of consumers has further weighed on the sales and profitabilities of these companies, especially the packaged food and nonalcoholic beverage manufacturers.

In comparison, the Consumer Discretionary Select Sector SPDR ETF (XLY), the Technology Select Sector SPDR ETF (XLK), and the SPDR S&P Retail ETF (XRT) rose 10.8%, 8.6%, and 7.5%, respectively during the first half of 2018.

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The outperformers

Amid these challenges, shares of Dr Pepper Snapple Group (DPS), Archer Daniels Midland (ADM), McCormick (MKC), Sysco (SYY), Costco (COST), and Estée Lauder (EL) bucked the sluggish industry trend and outperformed the broader market (SPX). Notably, acquisitions, core business strength, innovation-led product introductions, and a lower effective tax rate have driven growth for these companies.

The stock prices of Dr Pepper Snapple, Archer Daniels Midland, McCormick, Sysco, Costco, and Estée Lauder rose 25.7%, 14.3%, 13.9%, 12.4%, 12.3%, and 12.1%, respectively, in the first half of the year. Meanwhile, the S&P 500 Index rose 1.7% during the same period.

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