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'Pick and choose your spots' in the consumer staples space, trader says

Analysts clash on consumer staples stocks. Here are the plays to watch

Consumer staples stocks are a mixed bag.

That's what Bill Baruch, president and founder of Blue Line Capital, and John Petrides, portfolio manager at Tocqueville Asset Management, told CNBC's "Trading Nation" on Thursday after a pair of dueling analyst calls in the space.

Jefferies, the more bullish of the two, upgraded beverage conglomerate Keurig-Dr Pepper and added Procter & Gamble to its list of franchise picks, saying the two are riding long-term "mega-trends" in consumer behavior.

Bernstein analysts, however, got bearish on some of the pantry plays that outperformed at the start of the coronavirus pandemic, downgrading General Mills, Campbell Soup, Kellogg and J.M. Smucker to "underperform."

"You need to pick and choose your spots within the sector because you really have the perfect storm for consumer staples to rally," said Petrides, who works in his firm's wealth management division.

Even as economies reopen, many consumers still have few physical places to spend money other than the grocery store, Petrides said. That bodes well for staples companies, "which are inherently low-beta, less volatile, and in a low-interest-rate environment, they throw off good dividends," he said.

But with the group now trading at sky-high valuations, investors have to consider what could happen a year from now, when the companies will be under pressure to deliver comparable year-over-year earnings results, he warned.

"They're going to have ... very difficult comps to face year over year because right now, their margins are growing because they don't have the coupon," he said. "They don't have to take any discount to any of their products because where else are the consumers spending their money but at the grocery store? So, I think you have exposure to this space, but you have to pick and choose your spots."

Baruch agreed about being selective, saying one of Bernstein's downgrades could have more potential than those analysts believed.

"You don't need to be overexposed in names like Campbell's [and] Kellogg," said Baruch, president and founder of Blue Line Futures. "However, I do like General Mills, and I think there's a ... great technical setup there."

Just this year, General Mills has managed to rally above its 2019 and 2018 highs, Baruch said, citing the above chart. Now, he said, it appears to be "setting its sights" on its 2016 high of $72.95 — that is, if it can stay above the $58 level.

General Mills shares closed 3.5% lower at $60.58 on Thursday.

"There's support there now at the 0.618 retracement, which is also a trend line of a floor from that 2018 high," he said, referring to the Fibonacci retracement levels drawn above in orange. "So, the longer we stay out above 58, ... I like being long. I think it can rally."