Trading Nation

One of the most hated sectors is showing signs of life, and two stocks could lead the recovery

Consumer staples are seeing their best month since November. Here’s how to play it
Consumer staples are seeing their best month since November. Here’s how to play it

Call them the cereal killers.

Investors have dumped shares of so-called soup and cereal stocks over the past year on fears of changing consumer tastes and rising rates, and that has caused the consumer staples sector to fall more than 10 percent in 2010.

But the group has recently been showing signs of life, bouncing 3 percent in June and one chart watcher sees two names that could lead the group higher.

The first, Costco, "has been in an uptrend no matter what time horizon you look at, going all the way back to 2009," Frank Cappelleri, senior equity trader at Instinet, told CNBC's "Trading Nation" on Tuesday. "Costco has outperformed consumer staples eight out of the last 10 years."

That trend is holding this year, too. Costco shares have added 10 percent in the year to date, while the XLP consumer staples ETF has declined 10 percent.

"It has formed some higher lows along the way so I think we wait for weakness and buy it there," added Cappelleri.

Costco shares hit a higher low in early June, roughly 2.6 percent above the previous low made in early May. The stock hit its highest level on record in intraday trading Wednesday.

Conagra's sideways trading his year has Cappelleri waiting for signs of a move higher before he commits to a buy.

"We haven't seen a breakout here yet in Conagra but that's the key," he said. "I wouldn't jump in and buy it just yet until we have the breakout so the best-case scenario would be seeing Conagra break out on a relative basis and also an absolute basis."

Conagra shares have moved more than 1 percent higher for the year, outperforming the XLP ETF but underperforming broader markets. The has added 4 percent in 2018.

Gina Sanchez, CEO of Chantico Global, is growing more bullish on the entire sector based on its position as a defensive play against slower economic activity.

"If you think about the big picture, consumer staples are late-cycle performers so they tend to perform once an economic expansion has already pretty much gone through its process, peaked and is starting to slow," Sanchez said on Tuesday's "Trading Nation." "We believe that that is probably happening as we speak."

Sanchez anticipates slower U.S. economic growth by the end of 2018 and into 2019. Economists surveyed by FactSet expect domestic GDP of 2.7 percent in 2018 to contract to 2.4 percent growth in 2019.

"This is exactly the time when consumer staples should start to benefit. Investors are getting tired of their growth trades, they're starting to rationalize those multiples and we've already seen the S&P generally roll over," she said.

Sanchez is placing her bets on defensive names with solid revenue streams such as food retailers and soda companies.