Book Profits in Overvalued Consumer Staples

NEW YORK ( TheStreet) -- The consumer staples sector covers what consumers eat, drink, smoke, clean with and use to primp their bodies. It includes supermarkets, drugs and some Big Box retailers. These companies' stocks have been popular choices for investors seeking safety, since consumers still must buy and use products considered necessities.

Last Tuesday, the Conference Board's reading on the Consumer Confidence Index came in better than expected at 65.9 in July, but this reading remains well below the neutral zone of 90 to 120 for this measure.

On the same day, the personal spending report for June showed no growth for the second month in a row. This is not data that can sustain the stock strength seen in the consumer staples sector.

A great benchmark for the consumer staples sector is the Consumer Staples Sector SPDR Fund ( XLP), which contains 41 stocks including four in alcoholic beverages, five in soft drinks, 13 in food, two drugstores, four supermarkets, three soap producers, four tobacco companies and two cosmetics companies. These companies all make products consumers use regardless of the economic times.

Source: Thomson Reuters

The consumer staples sector is 11.3% overvalued, according to ValuEngine. The Consumer Staples SPDR traded to an all time high at $35.82 on July 31 and as low as $19.28 in March 2009. The upside to last week's high was a gain of 85.8%.

The weekly chart shows that XLP is positive but extremely overbought with a 12x3x3 weekly slow stochastic reading of 91.84 on a scale of zero to 100, where a reading above 80 is overbought. XLP is above its five-week modified moving average at $34.98. My annual value level is $32.87 with a monthly pivot at $36.06 and quarterly risky level at $37.64. "Buy-and-trade" investors should sell strength to $36.06 and $37.87.

With XLP overvalued fundamentally and overbought technically, it should be difficult to maintain a continued series of all time highs for the stocks in this sector.

The above table shows data from covering the 41 components of the XLP listed from top to bottom by percentage of index weight. This ETF is heavily weighted by Dow Components Coca-Cola (KO) (12.78%) and Procter & Gamble (PG) (12.58%).

Reading the Table

OV/UN Valued -- The stocks with a red number are undervalued by the percentage shown. Those with a black number are overvalued by the percentage shown, according to ValuEngine.

VE Rating -- A 1-Engine rating is a strong sell, a 2-Engine rating is a sell, a 3-Engine rating is a hold, a 4-Engine rating is a buy and a 5-Engine rating is a strong buy.

Last 12-Month Return (%) -- Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return -- Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Analysis of the Consumer Staples Sector

Looking at the overvalued and undervalued data, the XLP is equally split between undervalued and overvalued stocks with 20 undervalued and 21 overvalued. All but three stocks are rated strong buy or buy, according to ValuEngine. Three are rated hold.

Thirty-two components of the XLP have moved higher over the past 12 months, while nine have declined. Six moved higher by more than 40%, with Wal-Mart ( WMT) up 49.3%, Altria ( MO) up 44%, Reynolds American ( RAI) up 41.5%, Whole Foods Market ( WFM) up 50.2%, Monster Beverage ( MNST) up 76.5%, and Constellation Brands ( STZ) up 53.8%. The biggest gainers were, therefore, the largest retailer and supermarket, an upper-end supermarket, two tobacco stocks, a soft-drink maker and a maker of wine, beer, vodka and whisky. Consumers in this sluggish economy have been eating, smoking and drinking.

All 41 components are projected to have higher prices 12 months from now, but I am concerned about the generally elevated price-to-earnings ratios, since 25 of the 41 stocks have P/E ratios above 15.

Wal-Mart ($74.55) traded to a new all-time high of $75.24 on July 30. My monthly value level is $71.04 with a weekly risky level at $76.41. WMT reports quarterly results pre-market on August 16, and current earnings expectations are for $1.17 a share.

Altria ($35.92) traded to a new all-time high of $36.29 on August 1. My semiannual value level is $28.53 with a monthly pivot at $35.73 and quarterly and annual risky levels at $37.18 and $37.98.

Reynolds American ($46.61) traded to a new all-time high of $46.93 last Friday, Aug. 3. My monthly value level is $43.50 with a weekly risky level at $48.28.

Whole Foods Market ($94.60) traded to an all-time high of $97.25 on June 26. The stock fell to $81.55 into July 23 and traded as high as $95.98 Friday, giving investors a second chance to sell strength. My weekly and monthly risky levels are $100.09 and $100.37.

Monster Beverage ($66.78) traded to an all-time high of $83.96 on April 30. The stock fell to $61.72 into July 23, and last Friday's high was $66.96. My semiannual value level is $58.04 with a weekly pivot at $65.52 and quarterly risky level at $72.49. MNST reports quarterly results after the close on Aug. 8, and earnings are expected to be 62 cents a share.

Constellation Brands ($29.92) is trading up towards an all-time high of $31.60 set in June 2005. My monthly and annual value levels are $27.50 and $27.35 with a quarterly pivot at $28.23 and annual and weekly risky levels at $31.07 and $32.23.

To summarize, the XLP has had strong upward momentum that has led the index to become overvalued fundamentally and overbought technically. Given weak consumer confidence and flat personal spending, it is time to book profits in this sector.

At the time of publication, the author did not own any of the stocks in the table shown and held no positions in XLP.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at