Trading Nation

As consumer staples get slammed, one name looks primed for a breakout, Piper Jaffray says

Trading Nation: Staples get slammed

The consumer staples sector opens this week at the bottom of the again, but one technician has identified a quiet achiever that could break out.

"Take a look at the chart of Hormel," Craig Johnson, chief market technician at Piper Jaffray, told CNBC's "Trading Nation" on Friday. "It started to show a big, interesting-looking base, reversing a downtrend — it's put in a higher low."

Hormel Foods has risen nearly 5 percent over the past three months, one of just nine consumer staples stocks in the green over that stretch. It is down 1 percent for the year, a fraction of the XLP consumer staples ETF's 13 percent drop.

"Our fundamental analyst Michael Lavery thinks that this is a $39 stock so about 9 percent upside," said Johnson. "On the charts, I see a little bit more, toward the low $40s so 12 to 15 percent upside. That would be one name that we'd find of interest in the space if we had to be there for exposure purposes."

The average analyst price target of $35 a share for the maker of Spam implies 2.5 percent downside from current levels.

The broader sector's technicals suggest more pain ahead, says Johnson. Piper Jaffray has been underweight the group for just over two years.

The fundamentals case for consumer staples also looks ugly, according to Michael Binger, senior portfolio manager at Gradient Investments.

"This classic defensive sector has really been a land mine for investors lately," Binger said on Friday's "Trading Nation." "The way they've been getting earnings growth is to acquire each other, cut costs, take on debt and buy back stock, so this type of financial engineering seems to have hit a wall lately."

Components within the XLP are expected to post collective 12 percent earnings growth for 2018, according to FactSet. earnings are forecast to rise by 20 percent in 2018.

"Investors are really de-rating these stocks, they're taking them from what's been a premium to the market to a discount to the market," Binger said. "So as long as we have companies like General Mills, Phillip Morris, [Molson Coors], Kraft Heinz, I think this is a sector to stay away from."

The XLP is on track to end May in the red, its fourth straight month in decline.