Staples stocks are on a tear.
The sector rocketed to a new high this week as names like Kellogg posted better-than-expected earnings.
But if history is any indication, the rapid rise could spell impending doom.
The sector currently trades at 19 times forward earnings, roughly equivalent to the high-growth tech sector. The last time the XLP consumer staples ETF traded at this heightened valuation, in early 2018, it preceded a drop of nearly 20% over the next three months.
Despite the runup, Miller Tabak's Matt Maley argues that the sector's charts look solid.
"The chart looks fine. You look at a longer-term chart on the XLP, it made a very nice double bottom in 2018. And then when it bounced off that, it bounced so strong it moved up to a new all-time high, and a meaningful all-time high," he said Thursday on CNBC's "Trading Nation."
But he thinks the sector isn't immune to systemic risks in the market, especially since staples currently look "a little bit over-owned."
Staples stocks are often referred to as safety or defensive trades since investors tend to pivot into them when they sense risks in other areas of the market or broader economy.
But this time around if the market starts to move lower investors won't "go piling into the group like they have in the past because they already own a lot of those names," said Maley. That means the sector could be "vulnerable" to the type of pullback it experienced in 2018.
After the recent push higher, staples now trade at the same valuation as tech stocks, which Strategic Wealth Partners' Mark Tepper believes isn't justified.
"The [staples] are all really expensive, and it's really tough to get excited about buying them at these current valuations because you're really just paying a lot for companies that aren't growing all that fast at all, especially when you compare them to what's going on in the tech sector," Tepper said on "Trading Nation."Â
"Tech is growing earnings at three times the rate of staples," he continued, and so "looks much more appealing."
Tepper does believe that staples stocks could continue to outperform while there's "uncertainty surrounding the entire economy," and he thinks Walmart is the most appealing of the bunch since it can outperform in any economic environment.
"It's a huge company that's accessible in 90% of U.S. households," he said. "I mean, they're literally everywhere, and if the economy slows, it's a good place to hide out. The majority of their business is still groceries and people need to eat regardless of what's happening in the economy."
Big box retailers traditionally have relatively low margins, but Tepper points to ways that Walmart is making up for that, such as increasing volume and rolling out curbside pickup, which should "help to drive more volume."
The company currently trades at 22 times forward earnings, which he says is a "bit expensive," but he added that if investors are looking for some safety in their portfolio, Walmart provides that.
Disclosure: Strategic Wealth Partners owns shares of Walmart.
