RSPS trade ideas
Consumer staples look poised to outperform this earnings seasonWe've now had five early earnings reports from the consumer staples sector in the last couple weeks, including today's reports from General Mills and Constellation Brands. On average, EPS for these companies beat analyst estimates by 12.5%, revenue beat by over 3%. That suggests that analysts have underestimated both demand and profit margins for this sector in Q2. I think we'll see strong performance from the sector as we head into the July earnings season. The risk for this sector is that companies won't issue guidance for Q3. We've already seen weak post-earnings stock reactions from Kroger and General Mills as a result of their failure to issue guidance.
In addition to earnings outperformance in Q2, consumer staples may benefit from any news of economic "reclosing" as we go into Q3. Bank of America reported today that "The percent of businesses open relative to the baseline (pre-covid) levels has stalled at around -20% to -21% and the number of hourly employees working remains down around 23%-24%." Likewise, Goldman Sachs "calculates that 40% of the US has now reversed or placed reopening on hold." If consumers continue to stay home, then consumer staples sales will remain strong in Q3.
A few opportunities are emerging for long-side tradersConsumer staples have sold off along with the rest of the market, but if grocery store shelves are any indication, this sector should have a pretty good quarter. With people eating out less and eating at home more, expect several months of strong demand and good free cash flow in this sector. RHS looks to me to be finding support, and the big volume spike today implies that we've possibly reached a reversal level.
Now that the news environment around travel bans and quarantines has settled somewhat and we know what the next month or so will look like, I'm starting to see signs of divergence between the winners and the losers. There's going to be a lot of stock picking and a lot of attention to sector-specific economic data and company-specific guidance and financials. There are starting to be a few reasonable long plays, including consumer staples (RHS), video games (ATVI), streaming services (NFLX), direct-to-consumer shippers (FDX, UPS), and remote working software (CSCO).
Consumer staples bullish MACD crossThe Invesco equal weight consumer staples fund made a bullish MACD cross today on the daily chart. It's also above signal on the weekly chart, so this cross should have some legs. Consumer staples are a counter-cyclical sector, so they tend to do well as the economy heads toward recession.
Consumer staples and utilities to gain while market pulls backNearly every single sector in the entire market is either overbought or down-trending right now, with two exceptions. Consumer staples and utilities are both climbing out of oversold territory and should gain Friday while the rest of the market pulls back.
