Consumer staples stocks have lagged the market by a wide margin over the past year, but at least one portfolio manager is banking on a big turnaround, CNBC reports. Chad Morganlander of Washington Crossing Advisors, a division of Stifel Nicolaus, told CNBC: "We think that this is a terrific time to buy the consumer staple market. This is going to be a market environment where you're going to have sector rotation that'll be quite violent and we think eventually by the end of the year this sector will do quite well." His picks include Hormel Foods Corp. (HRL), The Procter & Gamble Co. (PG) and The Hershey Co. (HSY).

John Apruzzese, chief investment officer at Evercore Wealth Management, has a different take. As he told Barron's, his firm is avoiding consumer staples, but "We have been overweight for quite a while in consumer discretionary, Including Domino’s Pizza [Inc. (DPZ)] and [The] Home Depot [Inc. (HD)]."

Comparative Statistics

For the five stocks, statistics are through the close on May 9, using adjusted close data from Yahoo Finance:

  YTD Gain 1-Year Gain Forward P/E
Hormel 0.8% 7.8% 18.8
P&G (19.9%) (13.3%) 16.2
Hershey (17.9%) (10.9%) 16.5
Domino's 32.6% 29.2% 26.1
Home Depot (1.1%) 22.0% 18.3
S&P Consumer Staples (14.0%) (10.6%) 16.2
S&P Consumer Discretionary 5.7% 14.8% 19.2
S&P 500 0.9% 12.6% 16.0

Price change data for the S&P 500 Consumer Staples Sector (S5CONS), S&P 500 Consumer Discretionary Sector (S5COND), and the full S&P 500 Index (SPX) is per S&P Dow Jones Indices. Forward P/E ratios for the full S&P 500 and the two sectors were calculated as of May 3 by Yardeni Research Inc.

The Case for Consumer Staples

As Morganlander told CNBC: "The are several factors that have put pressure on the group. One, the rise in interest rates I think may have caused a massive sector rotation. Two, competitive pressures on pricing. And, thirdly, you have trucking issues as well as costs that have been going up, putting modest pressure on gross margins." 

He believes that investors have overreacted, creating a buying opportunity. Also, he said that his three picks are "good quality companies that have consistent revenue growth, consistent operating profits as well as they're rising dividend names with very low debt."

The Case Against

On the same CNBC segment, Michael Bapis, who heads a wealth management practice affiliated with HighTower Advisors, offered a bearish view of consumer staples: "Margins are getting compressed so rapidly, and the companies in this space are having trouble to produce better profits, trying to produce earnings, and I don't think they're going to be able to in the short term." The one stock in the sector he would buy is The Kraft Heinz Co. (KHC).

'The Market Is Not Expensive'

Apruzzese told Barron's that he prefers real earnings yield, or earnings yield minus the rate of inflation, as a valuation metric, rather than P/E ratios. Based on 60 years of history, he finds that the average rate of inflation was 3.7%, and the average earnings yield was 3%. "It is not expensive ... Today, on the real earnings yield, the market is almost exactly at its long-term average," he said. In contrast to competitors who think that stocks are highly valued, and that returns over the next 10 years will be about 5% to 6% annually, Apruzzese's firm expects average stock gains of 7% per annum during the same period.

He added that the CAPE ratio is deceptively high right now: "[It] looks really expensive using the average of the past 10 years. Of course it does, because it includes 2008 and 2009. As soon as that rolls forward, the P/E falls." (See also: Why the 1929 Stock Market Crash Could Happen in 2018.)