This story originally appeared on Zacks
2022 is set to be a tough year for investors as stocks returned double digits in each of the prior three years. After minimal pullbacks in 2021, volatility has returned and is likely here to stay for the remainder of this year. There are countless worries in the present investment landscape including foreign turmoil with Russia and Ukraine, inflationary pressures, continuing supply chain issues, and a Fed set to embark on a rate hike journey. The fact that this year is a midterm year simply adds to the list of growing concerns.
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Defensive sectors such as consumer staples tend to outperform in years where the overall market is weak. Energy is leading the way this year as inflation has yet to peak, but consumer staples are vastly outperforming the more aggressive sectors like consumer discretionary and technology. Knowing that this year has a high probability of being a relatively flat (and potentially even negative) year for stocks, how do we as investors go about picking stocks in this type of environment?
The first step is to identify leading industry groups. Quantitative research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. Focusing on stocks within the top-performing industries provides a constant tailwind to our investing results. Including this step in our selection process also allows us to narrow down the investment universe and select stocks with the best profit potential.
The length of time that industry groups remain at the top can vary from a few months to many years – it ultimately depends on the market environment. The top-performing industry groups are constantly changing, so investors would be wise to stay abreast of these groups. The stocks within those industries will typically be leading the market, and it is these stocks that we want to target for additions to our portfolio.
Fortunately for investors, we here at Zacks provide you with a proprietary industry group ranking system called the Zacks Industry Rank. This system harnesses the power of the Zacks Rank, meaning that the top-ranked industries contain more stocks that are receiving upward earnings estimate revisions. Simply put, your most profitable stocks will be those with upward earnings estimate revisions in the industries enjoying the same.
Targeting the top Zacks Ranked Industries is a great starting point to begin building out your portfolio. Let’s take a look at an example of an industry group that is outperforming in the current market environment and whose constituents are receiving positive earnings estimate revisions.
The Zacks Food-Confectionery industry, part of the Consumer Staples sector, is currently ranked in the top 15% of all industry groups. More specifically, this group is ranked #39 out of all 254 industries. Below we will analyze two constituents that are part of this leading industry group.
Hostess Brands, Inc. (TWNK)
Hostess Brands is a packaged food company that develops, manufactures, and distributes snack products primarily in the United States. TWNK provides a wide range of sweets such as donuts, pastries, cookies and wafers under various recognized brands like Twinkies, CupCakes, Donettes, HoHos, and Cloverhill. Hostess Brands was founded in 1919 and is headquartered in Lenexa, KS.
A Zacks #2 (Buy) stock, TWNK has exceeded earnings estimates in each quarter for the past three years running. The company most recently reported EPS of $0.21 for the quarter ending last September, a 10.53% surprise over consensus estimates. TWNK has delivered a trailing four-quarter average earnings surprise of 5.02%, aiding the stock’s 42.07% return in the past year.
Hostess Brands Price and EPS Surprise
News broke just this morning that TWNK will be added to the S&P SmallCap 600 index, which sent shares up over 5% at the time of this writing. The stock will be added to the index on February 1st. Portfolio managers and institutions who seek to track the index will need to shift allocations in order to account for the change.
TWNK is due to report its final set of earnings from 2021 for the quarter ending in December on March 1st. In total last year, EPS is expected to have risen 14.67% to $0.86, while revenues are anticipated to have climbed by 10.87% to $1.13 billion relative to 2020. Looking into 2022, the Zacks Consensus Estimate for EPS stands at $0.94, representing growth of 9.79% versus last year.
The Hershey Company (HSY)
The Hershey Company is a global confectionery leader, providing items such as chocolate, sweets, mints and other snacks. HSY offers its products under well-known brands such as Hershey’s, Reese’s, Jolly Rancher, and Kit Kat. The company markets and sells its products to wholesale distributors, chain grocery stores, mass merchandisers, vending companies, and drug and convenience stores. HSY was founded in 1894 and is based out of Hershey, PA.
HSY reported stellar Q3 results back in October of last year, sporting EPS of $2.10 which translated to a +3.96% surprise over estimates. Solid consumer demand for its brands contributed to the upbeat performance. HSY’s market share has remained above pre-pandemic levels, with a confectionery share gain of nearly 100 bps and snacking share upgrade of 220 bps compared with Q3 2019 levels.
HSY has posted an average earnings surprise of 4.44% over the prior four quarters. The stock has been outperforming during the past year, delivering investors a 35% gain over that time frame.
Hershey Company The Price and EPS Surprise
What the Zacks Model Unveils
The Zacks Earnings ESP (Expected Surprise Prediction) seeks to identify companies that have recently witnessed positive earnings estimate revision activity. This proprietary Zacks technique has been very useful for finding positive earnings surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.
HSY, currently a Zacks #3 (Hold) stock, has a positive Earnings ESP (+0.90%). A beat may be in the cards for the upcoming earnings announcement. The Zacks Consensus Estimate for the most recent quarter calls for EPS of $1.63, or growth of 9.4% versus the same quarter last year. We’ll see how it all unfolds when HSY reports next week on February 3rd.
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