We are staying Long Consumer Staples. Hedgeye’s Macro team is calling for Quad 4 in Q2. Growth slowing remains the defining macro dynamic for 2022. Recent world events have introduced a new regime of inflation volatility. Food prices have hit a 40-year high. The average gasoline price in the U.S. has set a new record high. For Consumer Staples, we are seeing a high level of pervasive inflation. In the past two weeks, Consumer Staples stocks (historically the best performers in Quad 4) have reacted to Q1 shifting to Quad 3. Recent events have not changed our expectations for Quad 4 in Q2. We did a deep dive into the topic of food inflation. We still see an inflection in margins ahead for the Consumer Staples sector.
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We added PepsiCo to our Long position monitor. PepsiCo’s style factors align with outperformance in Quad 4. Share gains in international soft drink markets and the secular growth in snacking provide visibility in MSD% organic growth. PepsiCo shares have sold off recently, reflecting concerns about the company’s business in Russia. At 4% of sales, the circumstances are already discounted. PepsiCo’s market-leading brands are well-positioned to pass on price increases. Seeing less cost pressure and having more tools to manage the inflationary headwinds, PepsiCo will dictate pricing for most of the categories it competes in.
We also raised Grocery Outlet higher on our Long list, anticipating a traffic tailwind from inflationary pressures on household budgets.
The themes for our call:
