With U.S. equities faltering and September and showing few signs of breaking out of that slump through the first few days of October, this should be the time that investors warm to consumer staples stocks and exchange traded funds.
However, investors may find that faith is unwarranted with the defensive sector currently looking somewhat extended on valuation.
To be fair, the Consumer Staples Select Sector SPDR (NYSEArca: XLP) was not a dreadful performer as U.S. stocks dithered last month. However, XLP did finish September with a modest loss of 0.1%. That in a month in which XLP is historically one of the two best of the nine sector SPDR ETFs. [September’s Best Sector ETFs]
Still, XLP, the largest staples ETF by assets, is down nearly 1% over the past 90 days. Although that is better than the S&P 500 over the same period, the performance is not doing much to stoke confidence in the expected durability of the staples sector.
In a recent research note, AltaVista Research tagged XLP with an underweight rating, making the ETF the only one of the nine sector SPDRs the research firm labeled with that ominous rating. The Energy Select Sector SPDR (NYSEArca: XLE) was the only one of the nine SPDRs to earn an overweight rating from AltaVista while the remaining seven are rated neutral. [Value With Energy ETFs]
Typically, ETFs rated underweight by AltaVista “consist of stocks trading at relatively expensive valuations and/or having below-average fundamentals,” according to the research firm.
There are, however, signs that XLP could pick up the pace heading into the end of the year. For example, only three of the ETF’s top-10 holdings have traded lower over the past month with only Walgreen (NYSE: WAG) doing so in noticeable fashion. XLP’s top-10 holdings, a group that combines for nearly two-thirds of the ETF’s weight, also feature Dow components Procter & Gamble (NYSE: PG), Coca-Cola (NYSE: KO) and Wal-Mart (NYSE: WMT).
“Sales growth is forecast to pick up this year and next, which could translate into even faster earnings growth as margins tick upward. The sector’s P/E multiple has stalled in a narrow range for the last 18 months or so, and has lost ground relative to the S&P500 although in absolute terms it remains at a modest premium,” said AltaVista of the staples sector.
Consumer Staples Select Sector SPDR
