The bulls have certainly enjoyed the recent rally, as technology and growth stocks have led the way higher from the June low. As we approach the historically weak month of September, investors may be wondering if momentum can sustain at its current pace. From June 16thth In the end, the Nasdaq is up nearly 22%, while the S&P is up nearly 17%. The turnaround in stock markets was quick and violent, leaving many investors frustrated with this year’s whiplash action.
While the growth sectors of information technology and consumer discretionary were the biggest beneficiaries of the lows, there was strength in more defensive areas such as consumer staples earlier in the year. After lagging behind for most of 2021, the consumer staples sector has held up extremely well this year and is approaching a level where it could resume outperforming.
The consumer Staples Sector SPDR ETF XLP has shown resilience of late, up nearly 10% over the past year, while the S&P 500 is down nearly 3% over the period. XLP is approaching a price level where its relative strength may find support as we can see below:
Image source: Stock Charts
While this year’s performance is positive for the SPDR consumer sector ETF, it’s important to emphasize that defensive sector leadership can be a red flag. Most investors expect growth stocks that have rallied recently to continue to do so, but as we know, the crowd is usually wrong. With defensive ETFs like XLP coming to the fore, history has shown that increased volatility could be on the way in the coming months. Previous non-recession periods in which the S&P 500 posted negative returns tended to coincide with outperformance by the defensive sector, as we saw earlier in the year.
The Zacks consumer staples sector has held up well this year, down just 1%, while the S&P 500 is down more than 10%. Within this sector, industry group Zacks Beverages – Soft Drinks is in the top 35% of approximately 250 industry groups. This group has returned 6% this year, comfortably outperforming the S&P. As it ranks in the top half of all Zacks ranked industries, we expect this group to outperform the market over the next 3 to 6 months.
Historical research studies have shown that about half of a stock’s price gain can be attributed to its industry group. In fact, the top 50% of Zacks Ranking Industries outperforms the bottom 50% by a factor of more than 2 to 1.
Let’s delve deeper into a highly rated stock that is not only a component within this strong sector and industry combination, but has also weathered the volatility this year to make new 52-week highs.
Coca Cola FEMSA (COF)
Coca-Cola FEMSA is a bottler franchise that produces, markets and sells Coca-Cola branded beverages. The Company is a subsidiary of Mexico City-based Fomento Economico Mexicano and offers carbonated beverages, juice beverages, coffee, teas, sports and energy drinks, and plant-based products. KOF offers its products through supermarkets, discount and convenience stores, restaurants, bars and stadiums. The company also distributes and sells Heineken beer products in Brazil.
As the No. 1 strong buy Zacks stock, KOF has beaten earnings estimates in each of the last four quarters, with an average upside surprise of 26% over the past year. Coca-Cola FEMSA last reported Q2 EPS of $1.10/share in July, up +48.65% from the consensus estimate of $0.74. KOF stock is up 17% over the past year and is currently at a 52-week high.
Image source: Zacks Investment Research
Analysts have raised earnings estimates for the full year. 2022 EPS is up 14.98% to $3.53/share. Revenue is expected to increase 12.12% to $10.72 billion.
Image source: Zacks Investment Research
Keep an eye on KOF as the third quarter progresses.
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Coca Cola Femsa SAB de CV (KOF): Free Stock Research Report
Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.