Consumer staples kicked off the week with more losses, cementing their status as the worst performers of 2018.
Sector weakness has not deterred Chad Morganlander, portfolio manager at Washington Crossing Advisors.
“We’ve owned consumer staples and been overweight for the last three years,” Morganlander told CNBC’s “Trading Nation” on Friday.
Morganlander remains bullish on the sector even as the group sets itself up for its first yearly loss in a decade. The XLP consumer staples ETF is down 13 percent for the year, on track for its worst annual performance since a 17 percent decline in 2008. The ETF has dropped 16 percent since hitting an all-time intraday high on Jan. 29.
“There are several factors that have put pressure on the group,” said Morganlander. “One, the rise in interest rates I think may have caused a massive sector rotation. Two, competitive issues on pricing. And, thirdly, you have trucking issues as well as costs that have been going up, putting modest pressure on gross margins.”
Those pressures have led to outsized losses in the space and have presented a buying opportunity to Morganlander.
“We think that this is a terrific time to buy the consumer staple market,” he said. “This is going to be a market environment where you’re going to have sector rotation that’ll be quite violent and we think eventually by the end of the year this sector will do quite well.”
Hormel, Procter & Gamble, and Hershey’s are three names that could outpace the rest of the sector, according to Morganlander.
Those three are “good quality companies that have consistent revenue growth, consistent operating profits as well as they’re rising dividend names with very low debt,” he said.
All three are negative for the year. Procter & Gamble has dropped 21 percent and currently trades in bear market territory, Hershey is down 19 percent and Hormel has dropped 2.5 percent.
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Fellow market watcher Michael Bapis does not share in Morganlander’s optimism for the sector.
“We don’t love the space,” Bapis, partner and managing director at the Bapis Group at HighTower Advisors, said Friday on “Trading Nation.”
“Margins are getting compressed so rapidly and the companies in the space are having trouble trying to produce better profits, trying to produce earnings and I don’t think they’re going to be able to in the short term.”
Companies in the sector have seen some of the slowest earnings growth among S&P 500 companies over the first quarter. Profits have risen nearly 13 percent over the three months to March, below the 25.6 percent blended earnings growth on the S&P 500, according to Thomson Reuters.
Bapis does have one sector pick that could make a comeback after being beaten down harder than its peers.
“If I had to buy one company in the space I would buy Kraft Heinz,” said Bapis. “They’ve gotten hammered.”
Kraft has fallen 24 percent this year and is down 37 percent from its 52-week high. However, it has bounced 4 percent in May, putting it on track for its best monthly gain since November.