Consumer staples outperformed this year

Galeanu Mihai The consumer staples sector was a clear winner compared to major indexes in 2022 as investors turned defensive, but how will 2023 shake out? As part of its game plan for 2023, UBS said it has a shift of preferences within the consumer staples sector. After weighing inflation pressures, elevated interest rates and a pullback on consumer discretionary spending, UBS said it is most constructive on the beverage category given the superior growth characteristics, pricing power, and tilt towards high quality. UBS also favors household personal care names over packaged food stocks 2023 on the expectation HPC will experience better earnings growth driven by a larger recovery in gross margins and skew towards higher quality than food.

"In fact, HPC companies operate in more attractive end markets (faster growth, higher concentration, and better pricing power) than Food and we believe this will begin to take focus as price gains moderate." The year ahead is also expected to see a sharper focus on balance sheets from investors, which sets up well for the staples group after companies used excess profits and proceeds from divestitures during the pandemic to pay down debt and improve overall balance sheet positions. Looking ahead, packaged food companies in particular are expected to begin deploying their balance sheets to drive incremental growth moving forward. "We believe large-cap packaged food names with low leverage will look to capitalize on M&A opportunities as organic fundamentals moderate," noted Grom.

If the Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) is to outperform again in 2023, some of the heavy lifting could be done by top holdings Procter & Gamble (PG), Costco (COST), and Walmart (WMT). Tobacco mainstays Altria (MO) and Philip Morris International (PM) are also top ten holdings of most staples ETFs. UBS analyst Peter Grom and team forecast General Mills (GIS), Kellogg (K), and Mondelez International (MDLZ) will face the most significant FX headwinds to EPS across large cap food names.

On the bullish side of the ledger, the firm's top large cap picks for next year are Hershey (HSY), Conagra (CAG), Colagte-Palmolive (CL), PepsiCo (PEP), Coca-Cola (KO), and Constellation Brands (STZ). As for SMID cap stocks, the top picks called out were Simply Goods Foods (SMPL), Nomad Foods (NOMD), Vital Farms (VITL), and Celsius Holdings (CELH). The firm also has Buy ratings on Coca-Cola (KO) and Energizer Holdings (ENR) The consumer staples sector still blazes strong on a Seeking Alpha Quant Rating basis as well with 35 stocks earning a Buy quant rating.

The stocks in the group with the very highest quant score are Performance Food Group Company (PFGC), Cal-Maine Foods (CALM), Industrias Bachoco, S.A.B (IBA), Lancaster Colony Corporation (LANC), and Sendas Distribuidora S.A (ASAI). Of course, dividend investors have plenty to work with in the consumer staples sector. Of note, there are a handful of staples stocks that have a Quant Rating of Hold or better, dividend yield of 4.00% of higher, and PE ratio below 20.

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