No Surprise: Staples ETFs Gain Bullish Analyst Views
Perhaps it is a sign that investors are favoring value stocks over growth names. Or maybe it is indicative of investors getting defensive in anticipation of a broader market pullback. Whatever the reason may be, the consumer staples sector has recently rewarded investors in handsome fashion.
Adding to the bull case for the sector, recent economic data indicates the U.S. consumer is feeling a bit more confident and there are signs consumer spending could pick up later this year.
"Since products such as soap, toothpaste, and bathroom tissue remain staples of everyday life, household nondurable companies are generally less sensitive to economic conditions in comparison with other sectors," said S&P Capital IQ in a new research note. "That said, a sluggish U.S. economy still presents a challenging competitive environment for these companies, as they battle for a share of the limited consumer spending. Fortunately, signs of economic improvement have begun to appear, and we think the outlook for the U.S. consumer will strengthen later in 2013."
Even with some favorable domestic factors, including the housing recovery, S&P Capital IQ highlighted some staples names with significant international exposure. For example, the research firm has a three-star rating on Colgate-Palmolive (NYSE: CL) and a four-star rating on Tupperware (NYSE: TUP).
"Despite an anticipated improvement domestically, developing markets outside the U.S. continue to offer better growth opportunities, in our view," according to S&P Capital IQ. "Companies like Tupperware Brands and Colgate-Palmolive generate a significant portion of their sales in faster-growing emerging markets - 62% and 53%, respectively."
In a terms of more domestically focused play, S&P has a four-star rating on Church & Dwight (NYSE: CHD), the maker of Arm & Hammer baking soda and Trojan condoms, among other well-known products.
"Church & Dwight generates the majority of its sales in the U.S., although with 40% of its sales from value-oriented products, we expect it to gain market share while price-sensitive consumers adjust to the higher payroll taxes," said S&P.
Regarding ETFs, S&P has an Overweight rating on the Consumer Staples Select Sector SPDR (NYSE: XLP). With $6.19 billion in assets under management, XLP is the largest staples ETF by that metric. Highlighting just how much investors have embraced staples names this year, XLP has outperformed the SPDR S&P 500 (NYSE: SPY) by nearly 300 basis points on a year-to-date basis.
Of the aforementioned trio of stocks, only Colgate-Palmolive is a top-10 XLP holding. That stock is the ETF's eighth-largest holding with a weight of 3.53 percent. Procter & Gamble (NYSE: PG), Philip Morris (NYSE: PM) and Coca-Cola (NYSE: KO) combine for 34.4 percent of XLP's weight. XLP touched a new 52-week on high Monday.
S&P also has an Overweight rating on the $409.4 million iShares Dow Jones U.S. Consumer Goods Sector Index Fund (NYSE: IYK). IYK also features Colgate-Palmolive among its top-10 holdings while Church & Dwight and Tupperware are found further down the ETF's roster. Investors should note IYK offers more of a discretionary feel than XLP through holdings such as Ford (NYSE: F), Nike (NYSE: NKE) and Coach (NYSE: COH).
Still, Procter & Gamble, Philip Morris and Coca-Cola combine for almost 30 percent of the ETF's weight. Like XLP, IYK also touched a new 52-week on Monday. The fund is up nearly 10 percent year-to-date, but its expense ratio of 0.46 percent is noticeably higher than the 0.18 percent charged by XLP.
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