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3 Consumer Staple Stocks to Bet on this Earnings Season

As the earnings season picks up pace, investors believe Q4 is on track to record the best performance in the last eight quarters. We note that earnings growth had entered positive territory in the third quarter of 2016, having seen a decline in the preceding five quarters. The pace of growth, which is currently modest, should improve further going ahead.

Per the latest Earnings Trends report, 170 S&P 500 members have reported their quarterly numbers as of Jan 27, 2017. Total earnings for these members are up 6% on 3.1% higher revenues, with 64.1% beating EPS estimates and 54.7% coming ahead of top-line expectations.

These factors signal a booming economy and rising consumer spending. Moreover, global growth concerns seem to dissipate as political tensions associated with the U.S. election and Fed rate hike have been largely put to rest. Companies are looking forward to the policies of the new government and how those will help boost profits. President Donald Trump's tax and spending proposals are expected to aid growth in the near term.

Meanwhile, the consumer staples sector, often considered a safe haven during economic downturns, isn't the most attractive bet in this calm and bullish environment. Currently, it seems that with improving U.S. economy and global economic growth, investors might look for other lucrative sectors than consumer staples sector that generally acts as a port in times of storm.

As of Jan 27, 25% companies from the consumer staples sector enlisted on the S&P 500 have reported Q4 earnings. Out of these, 50% of the companies have posted an earnings beat while only 37.5% have surpassed revenue estimates. Earnings grew just 1.4% year over year while revenues declined 3.9%.

In such a scenario, we have identified three consumer staple stocks, which not only have strong fundamentals but are also likely to report solid quarterly numbers this week, despite the sector's underperformance.

Making the Right Pick

Since there are quite a number of companies in the consumer staples space, it may be difficult to pick the right stocks for your portfolio. One way to narrow down the list of choices is by looking at stocks with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP .

Earnings ESP is our proprietary methodology to determine which stocks have the best chance to surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

3 Solid Choices

Consumer goods behemoth The Clorox Company ( CLX ), which has a Zacks Rank #3 and an Earnings ESP of +0.82%, is an attractive pick for now. The company is slated to report second-quarter fiscal 2017 results on Feb 3, before the bell.

The Zacks Consensus Estimate for earnings stands at $1.22 per share. The company has delivered an average positive surprise of 3.2% in the trailing four quarters. It has a long-term earnings growth rate of 6.99%.

Clorox outperformed the Zacks categorized Soap and Cleaning Preparations industry in the last three months, as its shares gained 0.4% as against the industry's decline of 2.1%. Notably, the industry is part of the bottom 15% of the Zacks Classified industries (225 out of the 265). The broader Consumer Staples sector is placed at the bottom most of the Zacks Classified sectors (16 out of 16).

The company is keen on driving demand for its products by enhancing brand value through innovation and digital marketing. Further, management is confident about its core business plans, which should boost the upcoming results (read more: Clorox Q2 Earnings: Stock Set to Gain on Likely Beat? )

Investors can also count on cosmetics giant Estee Lauder Companies, Inc. ( EL ), which has an Earnings ESP of +0.86% and a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank stocks here .

The company posted positive earnings surprises in all of the past four quarters, the average positive surprise being 11.86%. It has a long-term earnings growth rate of 11.05%. Despite the headwinds, Estee Lauder has been adopting several strategic acquisitions to expand in the makeup category. In order to combat lackluster retail growth and tough competitive environment in the retail sector, Estee Lauder consistently undertakes product innovation and emphasizes heavily on marketing.

The company's fundamentals are reflected in the stock's price movement, which reflected a narrower decline in comparison to the Zacks categorized Cosmetics industry. Over the past one year, the stock lost 5.3% as compared with the industry's decline of 12.4%. The industry is in the bottom 18% of the Zacks Classified industries (218 out of the 265).

The Zacks Consensus Estimate for second-quarter fiscal 2017 earnings stands at $1.16 per share. The company is slated to report results on Feb 2, before the bell. (read more: Estee Lauder to Report Q2 Earnings: A Beat in Store? ).

We also suggest investing in Coty, Inc. ( COTY ), a manufacturer and marketer of beauty products worldwide. Based in New York, Coty carries a Zacks Rank #3 and has an Earnings ESP of +5.56%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Coty outshined the Zacks categorized Cosmetics industry in the last two quarters, with its shares gaining 1.5%, as against the industry's decline of 5.1%.

The Zacks Consensus Estimate for the second quarter of fiscal 2017 earnings stands at 36 cents a share. The stock has a long-term earnings growth rate of 9.52%. The company is scheduled to report results on Feb 2.

Bottom Line

We believe that investing in these companies, which have an earnings beat potential, should yield strong returns for your portfolio in the short term.

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Estee Lauder Companies, Inc. (The) (EL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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