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The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail around any material changes.

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Consumer Staples marginally outperformed the broader market last week, rising +0.5% versus the S&P500 at +0.4%. The XLP is up +1.2% year-to-date vs the SPX at +1.5%.

For a fifth straight week, the XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up. This is a material shift as the sector traded bearish TRADE and TREND for the majority of the year-to-date.

Just Charts: Secular Headwinds Remain - 1

However, the Hedgeye U.S. Consumption Model shows a worsening outlook, with only 5 of the 12 metrics flashing green, versus 7 two weeks ago. 

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Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.4x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, and rose to -30.0 versus -31.5 in the prior week

Just Charts: Secular Headwinds Remain - 3

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Top 5 Week-over-Week Divergent Performances:


Positive Divergence:  DF 6.9%; RCO.FP 6.2%; AVP 4.9%; TAP 2.9%; HLF 2.7%

Negative Divergence:  BNNY -6.4%; TSN -4.5%; MNST -4.1%; SAM -2.8%; THS -2.2%

Last Week’s Research Notes

Newsy News Flow

 

LO - Tobacco stocks took a slight hit last week on news that the British government may be moving toward instituting a tobacco plain packaging law by 2015. The UK would join Australia, the only other country that mandates plain packaging.

Lorillard does not have exposure in the UK, so we think the pullback in the stock creates a buying opportunity.  Broadly, we believe that despite best efforts of a government to reduce smoking rates through plain packaging, studies have shown that such measures can have harmful consequences by boosting illicit trade.

For reference, Imperial has the largest market share (42%), followed by Japan Tobacco (38%), PM (9%); BAT (8%), per Euromonitor.

We continue to believe LO will grind higher on advantaged menthol fundamentals, limited regulatory risk, and a growth engine in blu e-cigarettes. 

RCO.FP – Last week there were whispers that Remy Cointreau is a potential takeover target for Brown-Forman (BF/B), which sent the otherwise depressed stock soaring. We think a deal is unlikely given the high concentration of family ownership of Remy.

 

Quantitative Setup


In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

BUD – impressive bearish to bullish TREND reversal here in the last few weeks as the sector style and slow-growth-yield-chasing comes back into vogue; TREND resistance now support at $103.65

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DEO – still bearish intermediate-term TREND signal here with TREND resistance intact up at $125.97

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KO – looks nothing like BUD – bearish TREND remains, despite the market paying up for everything that Coke has (cap, yield, etc.); TREND resistance overhead at $39.05

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PEP – much healthier setup thank KO’s now that it has recovered TREND support of $81.85

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GIS – still one of the best looking names on this list; bullish TREND confirmed with TREND support = $49.99

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MDLZ – bullish intermediate-term TREND confirmed here as well provided that $33.89 TREND support holds

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KMB – still the best looking name on this list – bullish intermediate-term TREND with $107.06 being support

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PG – making a run for its TREND resistance line of $80.63 – can it pull off what BUD did, or will they have to report the quarter before that? Style factors being bid up by the market right now play into PG’s hand

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MO – bearish to bullish intermediate-term TREND reversal confirmed as $36.69 TREND resistance is now support

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PM – making a run for the style-factor roses here too! PM just closed above its $81.68 TREND resistance level for the 1st time in almost 3 months

Just Charts: Secular Headwinds Remain - PMM

Howard Penney

Managing Director

Matt Hedrick

Associate

Fred Masotta

Analyst