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You need to avoid these stocks—they’re in the ‘valuation stratosphere’: Trader

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Are consumer staples stocks overvalued?
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Consumer staples valuations are rising while their dividend yields are falling, and according to one trader, that spells trouble for the sector.

"From a trading perspective, I do think they are overpriced," said David Seaburg, Cowen's head of equity sales trading, Thursday on CNBC's "Trading Nation." "[It's] overvalued when you've got 86, 87 percent of the names within, the XLP trading above the 200-day [moving average]."

On Thursday, the expected forward dividend yield of the XLP ETF tracking the sector was 2.65 percent, while the forward price-to-earnings ratio was 20.7, according to FactSet. That compares to a dividend yield of 2.81 percent and a forward P/E ratio of 19.8 six months ago.


Seaburg said he thinks there are better opportunities in the market.

"This thirst for yield has really pushed a lot of these names into a valuation stratosphere, if you will, that I believe is unrealistic," he said, adding that he's not a fan of "blindly running after it."

However, Stifel Nicolaus portfolio manager Chad Morganlander said that some staples stocks remain attractive buys. Specifically, he recommend shares of both Church & Dwight and Pepsi.

"We believe both of those securities have an opportunity to go up about 10 to 15 percent over the course of the next 18 months—we think that's going to be far in excess of the market," said Morganlander.

He added that he expects those two companies to enjoy revenue growth and operating margins far in excess of analysts' current expectations.