Financial News
Today’s market could make Sysco stock break out, will it?
The new market cycle is getting underway, and some investors – maybe even yourself – are getting carried away by the bullish media and the market’s all-time high prices today. Far from sounding like a hurt bear, there are reasons why you may want to take some profits off the table and consider more ‘defensive’ names, characterized by their immunity to the business cycle.
Today’s market differs from the one you experienced throughout 2023, where growth projections (no matter how optimistic) were the rule of the land. Today, market preferences have changed as the FED rears its plans to pivot its strategy away from high rates and actually is proposing rate cuts to be seen through 2024.
Historically speaking, these interest rate transitions have never been smooth. This could be one of the reasons why the market has become more optimistic on names like Sysco (NYSE: SYY) as part of a strategy to protect the downside while still exposing investment dollars to a fraction of secular growth trends in the economy. A simpler version of this idea lies just ahead.
Money shifts
During the past twelve months, consumer discretionary stocks ruled the market. The continuation fallacy of the low-interest rate environment seen in the past led consumers to keep spending and financing purchases as if rates would stay low forever, and now, the tide is beginning to turn.
You can see this wave of confidence in stocks like Netflix (NASDAQ: NFLX) in their recent quarterly earnings announcement, which sent the stock higher by as much as 19.6% in the days following the report.
Taken as a whole, the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY) had been outperforming the broader S&P 500 during most of 2023 until the past quarter brought the sector to underperform by as much as 7.3%. Markets are forward-looking, and this could mean that consumer discretionary names are opening some space for a new leader.
While far from pointing fingers, a money shift to the more protective side of the equation could bring new investors and investment inflows into the Consumer Staples Select Sector SPDR Fund (NYSEARCA: XLP), which includes a wide variety of defensive names providing stability and immunity to where the business cycle ends up going.
Comparing this opposite sector, price-action-wise, to the S&P 500 over the past twelve months, you can notice how it has been left behind by as much as 20.5% in a disappointing underperformance. However, the past is no reflection of the future but a starting point. This wide gap could be closed in 2024 once the market preferences shift toward safer and stable growth names.
In fact, over the past month, consumer staples have outperformed the discretionary names by as much as 7.0%! Perhaps the money shift is already taking on water, and here is how you can get a front-row seat to get in the action.
The target is here
What is a better place to start looking into than food companies? After all, the very essence of defensive stocks starts in companies that sell products that people will need, whether unemployment is at 3.5% or 6.0%, food being one of them. So, depending on your portfolio appetite, here’s what you could consider doing.
Value investors may be leaning more toward US Foods (NYSE: USFD), not only because of the reasons explored previously but also because it is the cheapest name in the food staples industry. On average, the sector trades at a 14.7x forward price-to-earnings ratio to act as the benchmark of valuation against which to compare individual stocks.
With a discount of 5.4% to the sector, US Foods brings you a potential value deal in its 13.9x forward P/E. However, as the saying goes, it must be cheap for a reason. Exploring the market dynamic today, particularly where stability is preferred over growth could be why it’s so cheap.
Analysts see a 23.6% earnings per share growth in the next twelve months for US Foods, which should be enough to send the stock to the upper limits of valuation, yet the market is discounting it. This could be because investors are simply not buying this projection; they would much rather stay with a lower – though realistic – approach to future earnings.
On the other hand, Sysco stock commands a 7.5% premium to the sector with its 15.8x forward P/E multiple; why? Analysts only see 9.7% growth in EPS for this stock, making it much more realistic during 2024, which is filled with interest rate transitions and weakening consumer trends. It must be expensive for a reason, and the market is often not wrong.
Whether you seek deep value and know something about US foods that the market doesn’t, or you would much rather ride the momentum in Sysco’s more attuned earnings, there is an opportunity to be had in consumer staples sponsored by the FED.
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