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Chart Advisor: Defensive Stocks on the Rise

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Thursday, 13th January, 2022

1/Consumer staples sector stocks lift after inflation report 

2/ Back to basics       

3/ Is Costco a good buy right now?   

4/ The bottom line

1/ Consumer Staples Sector Stocks Lift After Inflation Report  

Stocks in the energy and consumer staples sector appear to have gone from the bottom of the pack to the top in just the past three months. These are the sectors most sensitive to inflation. The companies in the consumer staples sector, those often considered defensive stocks, are usually those that can raise prices of their products most quickly and can thus absorb the shock of higher wholesale costs. 

The chart below shows how State Street’s Energy sector ETF (XLE) and Consumer Staples sector ETF (XLP) are in the top two positions. Energy sector stocks took center stage yesterday after the news on oil inventories. Today’s market responded to the most recent Consumer Price Index (CPI) and Producer Price Index (PPI) reports released yesterday and today respectively. Both are measurements of inflation from different perspectives. Investors reacted to the news by taking profits in the broader markets while sending XLE 0.2% higher. 

Source: TradingView

2/ Back to Basics   

Defensive stocks are usually companies that sell items many consumers consider basic needs. The stocks often pay a dividend and tend to be long-standing, large companies with trusted name brands. The top five holdings within XLP are good examples. 

The chart below compares Procter & Gamble (PG), Pepsico (PEP), Coca-Cola (KO), Walmart (WMT), and Costco (COST) with XLP for the previous three months. Though this sector is trending higher, there is a significant amount of variability among just these holdings within the ETF. The contrast between WMT, which has trended sideways, with COST, which has recently pulled back from it impressive gains, could scarcely be more dramatic for stocks in this sector. 

Source: TradingView

3/ Is Costco a Good Buy Right Now?         

COST shares have risen nearly 30% in the past quarter, only to give back about half that gain in the last week. Investors and analysts must wonder whether the price change represents a problem or an opportunity.  

The company’s latest earnings report showed that it had met and exceeded expectations, though traders felt that challenges remain for the big-box retailer. The company recently warned that wage increases for 2022 might also take a toll on profit margins. However, if the company can lift prices to improve margins, such concerns may prove unfounded.

Source: TradingView

4/ The Bottom Line 

Stocks retreated in most sectors though the consumer staples sector had many stocks that rose. Stocks such as Costco may benefit from inflationary influences in the months to come. 

Originally posted on 13th January, 2022

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