What are we looking for?

U.S. consumer staple stocks with attractive valuations and earnings growth.

It has been an incredible year for U.S. equities, with the S&P 500 index up a bit more than 27 per cent year-to-date on a total return basis, on pace to beat last year’s total return of 18.4 per cent.

Although all major sectors of the S&P 500 are profitable this year, one sector has lagged the rest: consumer staples. The Consumer Staples Select Sector SPDR Fund (XLP-A), a proxy for the sector, is up 14.8 per cent year to date. Yet the sector has caught the eye of investors that watch for price breakouts in the search for new uptrends: This past week XLP surged almost 4 per cent after breaking above its prior record high at the US$73.50 level.

This week we screen consumer staples – a defensive sector – for ideas in case of a market downturn in the first quarter of 2022. Over the past five years, the first three months of the year typically have been an underperforming period for U.S. stocks.

The screen

We will be using Strategy Builder, Multi-Stock Trading LLC’s stock screener, to search for U.S. consumer staples stocks that have reasonable valuations and strong five-year historical growth in earnings per share.

We begin by setting a minimum market capitalization threshold of US$10-billion. This will focus our search on large cap stocks whose revenue streams tend to be more predictable than their smaller cap counterparts. We will also limit our search to stocks displaying trailing price-to-earnings ratios of 23 or less. The current P/E for the U.S. consumer staples sector is 23.1.

To select stocks with strong quarterly earnings growth, we will select only stocks with five-year earnings growth rate of 5 per cent or greater.

Finally, we will scan for the top-rated stocks using Multi-Stock Trading LLC’s Quantamental rating method. This metric ranks stocks on a scale of one to 10, with 10 being the most bullish rating and one the most bearish. TC Quantamental rating uses a combination of valuation, growth, quality, price momentum and income as key metrics when ranking a company. In our screen, we set a minimum ranking of five out of 10 in order to screen for the top-rated companies.

More about Multi-Stock Trading LLC

Multi-Stock Trading LLC is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.

What did we find?

Topping our list is Bunge Ltd., a global agricultural company in the food processing business that many investors have probably never heard of. The company has the lowest P/E on our list at just 5.5. The TC Quantamental rating for the company is the second-highest on our list at 7.4 out of 10.

The largest company on our list by market cap is Target Corp., a general merchandise and food retailer with a market cap of US$113.4-billion. Year-to-date and one-year returns are 34.1 per cent and 37.8 per cent, respectively – the highest price performance on our list. The current share price is down 15 per cent from its Nov. 15 high, which may be seen as a bargain by some investors.

Tyson Foods Inc., a producer of frozen and refrigerated food products, has the highest TC Quantamental rating on our list at 7.5. The company also boasts the second-lowest P/E on our list at 10.3. The stock’s share price confirmed a new 52-week high this week.

Dollar General Corp., the discount retailer, has the best five-year historical EPS growth rate on our list at 21.9 per cent.

For investors interested in dividends, household names Kellogg Co., Campbell Soup Co., and General Mills Inc. have the highest dividend yields on our list at 3.7 per cent, 3.4 per cent and 3 per cent, respectively.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Multi-Stock Trading LLC in respect of the investment in financial instruments. Investors should conduct further research before investing.

Gary Christie is head of North American research at Multi-Stock Trading LLC in Ottawa.