Trading Nation

Pepsi boost ignites the staples rally, but one trader warns to stay away

Trading Nation: PepsiCo's gains could be good for consumer staples

Pepsi shares were effervescent post-earnings report Tuesday, putting it on track for its best daily performance in nearly three years and leading consumer staples gains.

Cowen & Co.’s David Seaburg isn’t buying its sparkling rally.

“There maybe is a little more upside, but it’s really not a sexy story for me right now,” Seaburg, Cowen’s head of sales and trading, told CNBC’s “Trading Nation” on Tuesday, counting the challenges Pepsi faces in its U.S. soda business as one strike against it.

Its North American beverage business, which accounts for a third of total sales, has been squeezed by increased competition and a shift in consumer preferences toward healthier options.

Seaburg isn’t only cold on Pepsi. He’s avoiding the entire consumer staples space.

“I’m not a buyer of the sector,” Seaburg said. “I think it’s had its run. I think the downside risk is probably put in, but I just don’t see the upside here. I’d much rather own secular growth-type names in this particular market.”

Defensive names like consumer staples have seen renewed favor over the summer as trade war fears escalated. Recent gains in staples names have brought the XLP sector ETF back up to mid-April levels.

The options market is reflecting the bullish turn toward staples, says Stacey Gilbert, market strategist at Susquehanna.

“We had seen a shift more recently to more bullish flow within the consumer staples sector, so I do think that that sentiment has shifted,” Gilbert said on Tuesday’s “Trading Nation.” “I should highlight that the majority of that shift were in names that were part of the M&A chatter; they’ve been part of that pipeline or rumor mill in the past.”

Consumer staples have outperformed the over the past month with names like Campbell Soup, McCormick, Kroger, and Kraft Heinz leading the way.

On Pepsi, Gilbert prefers using bullish spreads because of higher volatility levels in the stock.