Consumer Staples Still Worth Considering Against Coronavirus Backdrop

The Consumer Staples Select SPDR (NYSEArca: XLP) is a prime example of a sector ETF benefiting from the coronavirus pandemic’s impact on shopping trends and there could be more of the same for XLP and the staples sector amid a resurgence in Covid-19 cases.

XLP seeks to provide investment results that correspond generally to the price and yield performance of publicly traded equity securities of companies in the Consumer Staples Select Sector Index that includes securities of companies from the following industries: food and staples retailing; household products; food products; beverages; tobacco; and personal products.

“The median stock in our coverage now trades at just a 1% discount to our fair value estimates, which is a sharp acceleration relative to the 14% discount the space boasted three months ago,” said Morningstar analyst Eric Lash in a recent note. “We think this partly reflects recent top-line acceleration, as consumers rushed to stock their pantries with essential fare. In this vein, consumer packaged goods and nonalcoholic beverages offered bargains at the outset of the pandemic in the U.S., but shares have since rebound.”

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Staples are extending a run of being sturdy amid the COVID-19 outbreak as the public seeks refuge within their homes, amid a haven of Clorox bleach, Coca-cola, and toilet paper. These are goods that will continue to be necessary regardless of the landscape, and some states are even mandating that stores remain open to sell them.

The consumer staples segment has long been viewed as a high-quality and defensive play. The slow and steady nature of the consumer staples business has long been touted as a safe play for all periods since consumers will still need to buy the basic necessities.

“As consumers switched to stock-up trips with larger basket sizes, out-of-stocks or limited supplies of certain items were common in the U.S.,” said Lash. “And in response, manufacturers halted previously slated promotions. But as the initial buying surge has waned and lockdowns lifted, items sold on sale have begun to edge higher. We think promotions may persist if a prolonged economic recession ensues.”

The coronavirus pandemic has caused a shift in the way Americans do business. Many traditional outlets that require face-to-face contact are struggling. Meanwhile, consumer staples have enjoyed strong demand as more stock up on basic goods, healthcare has found strength on continued demand for health services and technology companies are even enjoying continued business in response to the shift toward a work-at-home environment.

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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.