7 Ways to Profit from Consumer Staples
04/21/2011 4:00 pm EST
Though consumer staples aren’t the sexiest stocks on the Street, as the more difficult summer months unfold, these seven could bring added growth and stability to your portfolio.
Many sectors began the second quarter on a weak note after very choppy trading in March. The Consumer Staples and Health Care sectors clearly had the best relative performance and by mid-April were named the “Two New Market-Leading Sectors.”
While the overall market was locked in a trading range, these sectors continue to make higher highs. While the Consumer Staples sector is often considered defensive, I have selected a handle of stocks that offer good risk/reward ratios and have the potential for major upside breakouts.
The Select Sector SPDR-Consumer Staples (XLP) bottomed with many of the market sectors in mid-March as it tested the support at $28.70 before turning sharply higher.
Since then, it has had little in the way of a pullback, as it has held up much better on sharp market corrections than the higher-beta sectors. The daily chart of XLP looks very strong, as the 2007 and 2008 highs (line a) have already been exceeded.
The upper trend line resistance (line b) is now in the $31.60-$31.80 area. There is first good support in the $30.30-$30.50 area with the rising 50-day moving average (MA) at $29.75.
The six-month downtrend in the relative strength (RS) was broken in March, indicating that this sector was starting to outperform the S&P 500. The RS appears to be in the early stages of an uptrend.
How to Profit: Investing in XLP will give you good exposure to the whole sector, but the ETF is likely to have less upside potential than individual consumer staples stocks. I would go 50% long XLP at $30.36 and 50% long at $30.14 with a stop at $29.28 (risk of approx. 3.2%). On a move above $31.20, raise the stop to $29.74.
NEXT: 6 Consumer Staples Stocks to Consider|pagebreak|
Even though some of the stocks I have selected are trading well above last year’s lows, their charts suggest that they are ready to break through significant resistance levels.
Ethan Allen Interiors, Inc. (ETH) is a $680 million, well-known maker of furniture and other home furnishings. The weekly chart shows the sharp surge in late-January to a high of $25.05 (line b), but the ranges have narrowed over the past two months.
There is near-term resistance now at $24.20-$24.40. On April 18, when most stocks were getting punished, ETH was actually unchanged. There is initial support now at $23.40- $22.80 with more important support in the $21.40-$22 area.
The long-term downtrend in the on-balance volume (OBV) (line d) was broken early this year. On an upside breakout, the next likely target is the upper trend line in the $30 area that also corresponds to the highs from 2008.
How to Profit: Go 50% long ETH at $23.22 and 50% long at $22.66 with a stop at $21.46 (risk of approx. 6.5%). On a move above $24.90, raise the stop to $22.14 and sell half the position at $29.38.
Leggett & Platt, Inc. (LEG) is a $3.2 billion company that designs and manufactures home furnishings and fixtures and currently yields 4.7%.
LEG has been holding above support at $22.16 (line g) since December despite several sharp market declines. Over the past few years, a broader trading range is evident with major resistance at $25.70 (line f) and support at $20.20 (line h).
The resistance from 2006, line e, is in the $27.20 area. The weekly OBV is acting stronger than prices, as it has already moved above the highs made in 2010 (line i). The OBV shows a long-term uptrend from the 2009 low, line j. The OBV is currently below its weighted moving average (WMA) but could soon move above it.
How to Profit: Go 50% long at $23.18 and 50% long at $22.86 with a stop at $21.92 (risk of approx. 4.8%). On a move above $25.15, raise the stop to $22.14 and sell half the position at $26.77.
NEXT: A Household Name and an Under-the-Radar Standout|pagebreak|
Kimberly-Clark Corporation (KMB) is a well-known, $26 billion company that manufactures and globally markets a wide range of health care products. It is currently yielding 4.3% and will report earnings on Monday, April 25.
After a brief drop to the $63 level in mid-March, the stock has stayed in a narrow range. KMB has resistance going back to 2008 at $67.50, line a. A move above this level will suggest a test of the 2007 resistance at $71-$72.70.
The weekly OBV is above its weighted moving average and could convincingly break its downtrend, line c, this week. There is strong OBV support at line d.
On Wednesday, April 20, KMB surpassed short-term resistance at $66.20. There is good support on the daily chart in the $64.70-$65.50 area with the rising 200-day MA at $64.30.
How to Profit: Go 50% long at $66.18 and 50% long at $65.52 with a stop at $62.74 (risk of approx. 4.7%). On a move above $68.15, raise the stop to $64.64, and sell half the position at $72.44.
ACCO Brands Corporation (ABD) is probably a company that most have not heard of, although you may know of their Kensington brand of office products. ACCO Brands is a $500 million office products company that does business in North America, Europe, and Australia.
The long-term chart of ABD shows that it is still below the major 38.2% resistance at $10.85, which is calculated from the 2006 highs at $26.45. The 50% resistance stands at $14.00, which is a potential upside target. There is minor support first at $9.60 and then at $9-$9.20 with more important support at $8.40-$8.70.
The weekly OBV has formed higher highs after breaking through resistance at line c. The uptrend in the OBV, line d, also suggests this stock is being accumulated.
How to Profit: Go 50% long at $9.66 and 50% long at $9.32 with a stop at $8.82 (risk of approx. 7.1%). On a move above $10.40, raise the stop to $9.09, and sell half the position at $13.72.
NEXT: One Global Pick and Another from the US|pagebreak|
Tata Motors Ltd. (TTM) is the primary manufacturer of autos and trucks in India. It is a $16 billion company that also sells personal and commercial vehicles in Europe, Africa, the Middle East, and South America.
TTM peaked in November 2010 at $37.65 and had dropped to $23.25 in February, slightly exceeding the 61.8% support level from last summer’s lows. Over the past two months, TTM has formed a short-term uptrend, line b, with trend line resistance now at $29.30 (line a). The 50% retracement resistance is now at $30.50 with the more important 61.8% level at $32.30. A strong close above this level should confirm a resumption of the long-term uptrend.
The daily OBV is very close to moving above its weighted moving average, and if it can clear the resistance at line c, it would be quite positive.
How to Profit: Go 50% long at $27.72 and 50% long at $26.92 with a stop at $24.82 (risk of approx. 9.1%). On a move above $30.55, raise the stop to $26.18, and sell half the position at $31.88.
My last pick in consumer staples is a stock that I have liked since early March (see “Hedging Those Higher Grocery Prices”). Safeway Inc. (SWY) is a popular grocer and drug retailer that was moving higher when stock prices collapsed in the middle of March.
The close above resistance at line b completed the weekly triangle formation (lines b and c). SWY has just surpassed the late-2010 highs at $24 (line a), which is now first support. The triangle has upside targets at $25.50 with the 2010 highs at $27. SWY was a $38 stock in the spring of 2007.
The weekly OBV broke through resistance ahead of prices, as its downtrend (line d) was overcome in February. Volume is well above its weighted moving average, which could be tested on a pullback. Currently, there is strong chart and retracement support from the recent highs in the $22.80-$23.40 area.
How to Profit: As per my earlier recommendation, long positions were established in SWY at $21.87 with an initial stop at $20.33, which was raised to $21.18 on the move above $23.00. Half the position was sold at $23.84 or better in early-April for a 9% profit. Now, use a stop on this position at $22.69, and if not currently long, buy on a pullback to $23.56 with the same stop. Sell half of this position at $26.82.
(In the same article, I recommended buying Kroger (KR) at $22.88-$23.36, but it has not fallen below $23.39 since my recommendation and is now trading above $24.50. I now recommend cancelling this order.)
Though these consumer staples plays may not be the sexiest stocks on the Street, as we head into the more difficult summer months, having a portion of your portfolio devoted to this sector could impart some added growth and stability.
Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own. Readers can post questions or feedback in the comments area below or send to TomAspray@MoneyShow.com.