Hot upgrades in beaten-down, high-yield consumer staples

Key Points

• 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 NYSE: SPY 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 NYSEARCA: 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. 

Clorox investors clean up with a string of sentiment upgrades

Clorox 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%. 

Mondelez International is a top-rated dividend stock

Modelez International’s NYSE: MDLZ analysts' activity is mixed with some price target reductions and downgrades over the past few months, but the trend in sentiment is bullish. The consensus sentiment rating and price target are up compared to last year and rising following the Q3 results. Those results included top and bottom-line strength and improved guidance. 

The analysts rate this stock at Buy and see it trading near $80 or 10% above current action. They rate it highly enough to appear on Marketbeat’s Top Rated Stocks and Top Rated Dividend Stocks list. It trades at a better value than Clorox, 23X this year and 20X next year’s earnings, but there is a downside: it pays a smaller yield, about 2.4%. However, a healthier payout ratio and outlook for distribution growth offset the smaller yield. 

The J.M. Smucker Company: Deep value and a sweet dividend 

The J.M. Smucker NYSE: SJM is one of a handful of consumer staple stocks that offer deep value and high yield for investors. It is trading at less than 10X this year’s earnings due to fears of slowing growth that were not confirmed in the latest earnings report. Instead, that report included margin strength and volume gains in all segments that suggest normalization and a return to growth in the coming quarters. This stock pays about 3.5% and can be expected to make sustained annual increases for many years. 

Analysts' activity over the past 12 months has this stock among Marketbeat’s Lowest Rated, but the recent activity points to a change in sentiment. The five most recent reports, including one issued before the Q3 earnings release, are all bullish, including an Upgrade, several boosted price targets and one initiated coverage at Overweight.