The rally with many consumer staples stocks may not be over yet
Trots1905

The consumer staples sector comes off a year of strong performance with the S&P 500 Index trailing both the Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) and Invesco Dynamic Food & Beverage ETF (PBJ) by a wide margin as investors took a more defensive positioning. Looking at 2023, some investors are pushing back on valuations which have been stretched out beyond historic norms.
Mizuho Securities said it agrees with the caution over staples in general, but also regards EPS risks as largely limited given strong pricing power and moderating inflation.
"This may keep the group range-bound (and poised for more relative outperformance) while the broader market struggles under likely additional negative EPS revisions and negative surprises from inflation and rate hikes," noted analyst John Baumgartner and team. The firm remains largely cautious on discretionary spending and believes a premature rotation out of consumer staples could prove costly.
Within the food sector, Mizuho Securities singled out Kraft Heinz (KHC) as its top large cap value pick, Mondelez International (MDLZ) as its top large cap growth selection, and called out Simply Good Foods (SMPL) and BellRing Brands (BRBR) from the SMID growth category. The firm is most cautious on Hain Celestial (HAIN) and Beyond Meat (BYND).
Bank of America also thinks the food sector has the potential to extend on its outperformance in 2022, but is selective on which names may see further rallies. Key themes for investors to watch include the impact of consumers trading down, the potential for gross margin expansion if inflation moderates, activism scenarios, capital allocation moves, and M&A/divestitures activity. Analyst Bryan Spillane and team see a strong setup for PepsiCo (PEP), Mondelez International (MDLZ), and Hershey (HSY).
The food stocks that have ripped the biggest gains over the last 52 weeks are Lamb Weston (LW) +58%, WestRock Coffee (WEST) +42%, SunOpta (STKL) +35%, Campbell Soup (CPB) +29%, and Post Holdings (POST) +27%.
Some of the highest dividend yields to be found in the food sector are with B&G Foods (BGS) 12.98%, Calavo Growers (CVGW) 4.57%, and Danone S.A. (OTCQX:DANOY) 3.83%.
The food stocks with the highest Seeking Alpha Quant Rating are Lancaster Colony (LANC), MamaMancini's Holdings (MMMB), Cal-Maine Foods (CALM), Nomad Foods (NOMD), and Lifeway Foods (LWAY).
What to watch: The consumer price index report for December and next few months will give investors a look at which food categories are seeing prices finally moderate and which ones are seeing price increases prove sticky. The combination of consumers trading down and price elasticity staying strong has the potential to set up certain food companies for strong quarters ahead. Read Seeking Alpha's Catalyst Watch for a preview of the next week's big events including the CPI release.