ETF Trends
ETF Trends

The Consumer Staples Select Sector SPDR (NYSEArca: XLP) gained about 4% last month, putting the ETF in a tight battle with the Utilities Select Sector SPDR (NYSEArca: XLU) for top honors among the nine sector SPDRs, but not all analysts are impressed with the outlook for the consumer staples sector.

Staples ETFs, both of the traditional cap-weighted and smart beta varieties, have been on torrid paces as of late, regularly dotting the lists of ETFs hitting all-time highs. For example, nine ETFs hit all-time highs Tuesday and four of those were staples funds. Still, some analysts see the sector as having limited upside from here.

In a note out Tuesday, AltaVista Research revealed an underweight rating on XLP, implying “below average appreciation potential. A rating of UNDERWEIGHT is assigned to funds with ALTAR Scores™ above 3.0% but below 6.0%. Typically, funds in this category consist of stocks trading at relatively expensive valuations and/or having below-average fundamentals,” according to the firm.

Investors that disagree with that thesis are apt to find the timing of the criticism interesting because, as we noted earlier this week, XLP is entering a period of seasonal strength. Historically, XLP is the best of the nine sector SPDRs in August and the second-best in September. The long XLP and long XLU thesis has some points in its favor as August starts. Treasury yields are declining and investors appear comfortable with the notion that there are at least several months ahead before the Federal Reserve raises interest rates.

The long XLP and long XLU thesis has some points in its favor as August starts. Treasury yields are declining and investors appear comfortable with the notion that there are at least several months ahead before the Federal Reserve raises interest rates.

“Margins appear to be getting squeezed this year, and the strong USD isn’t helping things by acting as a headwind to revenue growth from abroad, resulting in a forecast decline in EPS this year. Estimates for next year look better. In any case Consumer Staples stocks have seen their P/E multiples expand considerably over the last five years. As a result these stocks appear rather expensive, and Staples has an UNDERWEIGHT recommendation,” according to AltaVista.

Consumer Staples Select Sector SPDR

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.