Hot Upgrades in Beaten-Down, High-Yield Consumer Staples

 | Dec 14, 2023 12:47PM ET

  • The S&P 500 is up, but only two of eleven sectors contribute to the gains
  • The consumer staples sector is the best-performing of the laggards, producing solid margins and paying shareholders
  • Analysts' sentiment shifted back into bull-mode for consumer staples stocks and has the entire group rebounding

    • The S&P 500 is up for the year, but it’s been a tough grind for most. While the broad market is up more than 20% year-to-date, the gains are centered in only two sectors and not all the stocks in those sectors are performing as well. Nine of the eleven sectors are down for the year on fears of slowing growth and the impacts of inflation, but the tide is about to turn.

    Among the drivers for many of these sectors is the yield on the 10-year treasury. The 10-year treasury yield and yield for most government debt hit the 5% range this year, sapping appetite for low-growth and no-growth stocks regardless of their yield. 5% risk-free return is attractive in an uncertain environment, but what comes next? The FOMC is expected to cut rates next year and could be aggressive, so bonds will quickly lose their appeal. That means it’s time to look at stocks that provide comparable yield and have a chance for capital appreciation you can’t get with a bond.

    In walks the Consumer Staples (NYSE:XLP). The Consumer Staples sector is the leading sector among this year’s laggards, with a decline of 11% at the year’s lowest levels and about 5% now. This sector trades at historically low valuations while paying some of the safest market dividends, whose yields outpace the S&P 500 on balance and triple it or more at the high end of the range. Because many have suffered growth-related anxiety to help devalue the shares, they are set up for robust rebounds, and analysts are priming the cannon.

    h2 Clorox investors clean up with a string of sentiment upgrades/h2

    Clorox Co (NYSE:CLX) has had the toughest time of any consumer staple since the pandemic began, with skyrocketing sanitizer demand slowly falling to a five-year low after the bubble burst. Today's takeaway is that demand has stabilized, and analysts view the latest guidance as cautious. They see sequential improvements gaining traction and driving outperformance in margin and bottom-line results over the next year.

    Regarding the analysts' activity, the stock received six consecutive positive revisions starting in early October and running through mid-December, including four upgrades and two price target revisions. This activity has the sentiment firming from Sell to Reduce and signaling a shift that should not go unnoticed. The average of the new price targets aligns with the broad consensus, which views the stock as fairly valued at current levels, but the high end of the range suggests the rebound in stock prices will continue. That target is near $162 or about 15% above the current action. CLX shares yield about 3.45%.

    Get The News You Want
    Read market moving news with a personalized feed of stocks you care about.
    Get The App