U.S. stock markets have been witnessing a strong rally since the middle of October. After an astonishing bull run in the last two pandemic-ridden years, Wall Street has had a disappointing 2022 so far.
We are not sure whether the current uptrend is a bear market relief rally as we saw from mid-June to mid-August, or a genuine reversal from the bear market. However, some ;positive developments are visible this time in the inflation rate as well as on the part of the Fed.
We are hopeful that the recent northbound movement of U.S. stocks will converge into a year-end rally. To tap this rally, we have selected five consumer staple stocks with a favorable Zacks Rank. These companies are — Conagra Brands Inc. ( – Free Report) , General Mills Inc. ( – Free Report) , Lamb Weston Holdings Inc. ( – Free Report) , The J. M. Smucker Co. ( – Free Report) and MGP Ingredients Inc. ( – Free Report) .
Positive Development on Inflation Rate
The consumer price index and the producer price index for October came in lower-than-expected. These two data along with the third-quarter 2022 personal consumption expenditure (PCE) price index — Fed’s favorite inflation gauge — have indicated that peak inflation may be behind us.
Consequently, the Fed is likely to relax its tighter monetary control. The central bank is expected to reduce the magnitude of the interest rate hike from the December FOMC meeting. This will help the overall equity market.
Although the Fed is yet to deliver any signal of shifting from its ultra-hawkish monetary policies, a section of Fed officials has recently spoken in a relatively dovish tone. Per CNBC, on Nov 22, Cleveland Fed President Loretta Mester said recent inflation data is promising and that she’d support reduced interest rate hikes going forward.
Market participants are assessing whether the terminal interest rate of the ongoing rate hiking process will remain within 5% or go beyond that.
Consumer Staples Immune to the Vagaries of Economic Cycle
The consumer staples sector is mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. The consumer staples sector includes companies that provide necessities and products for daily use. This makes the sector defensive in nature.
Therefore, this has always been a go-to place for investors, who want to play it safe during extreme market fluctuations irrespective of internal or external disturbances. Moreover, the sector is known for the stability and visibility of its earnings and cash flows. Consequently, adding stocks from the consumer staples basket lends more stability to portfolios in an uncertain market.
Out of the 11 broad sectors of the market’s benchmark — the S&P 500 Index — the energy sector is solely trading in ;positive territory with a huge rally of 68% year to date. However, within the remaining 10 sectors, consumer staples has suffered the least, with a marginal decline of 1.5% year to date while the benchmark has itself tumbled 16%.
Our Top Picks
We have selected five consumer staple stocks that are currently trading near their 52-week highs with more upside left. Each of our picks currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
Conagra Brands has been benefiting from its robust pricing actions, which aided the top line in the first quarter of fiscal 2023. During the quarter, earnings and sales grew year over year. Results gained from strength in the company’s brands, efficient pricing and the ongoing execution of the Conagra Way playbook.
CAG delivered improved service and productivity amid ongoing inflationary pressures and industry-wide supply-chain hurdles. Management expects the inflationary landscape to persist in fiscal 2023. CAG also expects volumes to be affected by supply-chain woes in the second quarter. Pricing and innovation are likely to aid Conagra Brands. We expect organic sales to increase 4.9% in fiscal 2023, which is at the higher end of CAG’s view of 4-5%.
Conagra Brands has an expected earnings growth rate of 3% for the current year (ending May 2023). The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 60 days.
General Mills has been gaining from its Accelerate strategy, which is highlighted by its key priorities. These include competing efficiently, investing in Holistic Margin Management and Strategic Revenue Management initiatives and reshaping the portfolio.
GIS’ recent portfolio reshaping actions are likely to drive long-term growth. In fiscal 2023, management expects a rise in the cost of goods sold. That said, saving and pricing actions should aid. GIS is also gaining from its Pet unit, as seen in the first quarter of fiscal 2023 when the top and bottom lines grew year over year.
General Mills has an expected earnings growth rate of 3.8% for the current year (ending May 2023). The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days.
Lamb Weston produces, distributes, and markets value-added frozen potato products worldwide. LW’s top line has been benefiting from robust price/mix, as witnessed during the first quarter of fiscal 2023. The price/mix increased 19%, reflecting gains from pricing actions in the core business segments to counter input, manufacturing and transportation cost inflation.
Lamb Weston’s top and bottom lines increased year over year in the quarter. LW saw net sales growth across all three reporting segments. While the macro environment remains volatile, management is on track to deliver results at the high end of the sales and earnings target in fiscal 2023. In addition, Lamb Weston has been keen on boosting production capacity to fuel long-term growth.
Lamb Weston has an expected earnings growth rate of 45.7% for the current year (ending May 2023). The Zacks Consensus Estimate for current-year earnings has improved 8.6% over the last 60 days.
The J. M. Smucker is a leading marketer and manufacturer of consumer food and beverage products and pet food and pet snacks in North America. Although the majority of SJM’s operations are concentrated in the United States, it also operates on an international basis.
SJM boasts a strong portfolio of iconic food and beverages. SJM mainly caters to the areas of coffee, pet food, peanut butter, fruit spreads, baking products, ready-to-spread frostings, frozen sandwiches, flour, juices and beverages as well as portion control products.
The J. M. Smucker has an expected earnings growth rate of 12.6% for next year (ending April 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days.
MGP Ingredients produces and markets ingredients and distillery products to the packaged goods industry. MGPI’s Distillery Products segment primarily offers food-grade alcohol, fuel-grade alcohol, and distiller’s feed. MGPI’s Ingredient Solutions segment primarily provides specialty wheat starches and proteins, commodity wheat starches, and commodity vital wheat gluten.
MGP Ingredients has an expected earnings growth rate of 12.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.9% over the last 30 days.