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

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 S&P 500 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.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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