Comfort food investing

April 25, 2016 01:00 PM

The Zacks Industry Rank is built upon the power of earnings estimate revisions. This means the better the earnings outlook, the higher the rank. This model has proven itself during the years with stocks in the top half of industries more than doubling the returns of those in the lower half. 

Unfortunately, now there are many signs of a slowing U.S. economy; and world economy for that matter. Because of that there are actually two negative earnings revisions for each positive. When conditions are like this, we often see more conservative industries rise to the top of the rankings. That is certainly the case this time around as meat producers are leading the pack. 

This makes sense given that no matter how bad things get, you still have to eat. And perhaps with a weakening economy more folks are eating at home. 

Now let’s take a deeper look into the three most attractive stocks in this top-ranked group. Note that each has enjoyed nice gains in early 2016 as most other growth-oriented stocks have taken it on the chin. And each, with earnings prospects on the rise, will likely continue to outperform.

Hormel Foods (HRL): This is by far the most consistent performer in the group, with only three earnings misses during five years. The most recent quarter sported an impressive 16% earnings beat that put everyone on notice that the party is far from over. Analysts cheered this report with ample estimate increases for the future. Plus, HRL shows an impressive Growth Style Score of B. 

Pilgrim’s Pride (PPC): This is more of a turnaround story after some operational stumbles last year. Now with earnings prospects on the rise, it is garnering some well-deserved attention. As is typical with stocks that had recent operational problems, the share price is depressed compared to peers and offers one of the better value propositions. The Value Style Score of “A” attests to that fact.

Tyson Foods (TSN): This is the most well-known stock in the group given its long-term strength as the leading producer of chicken and poultry products. After two consecutive earnings misses they set the record straight with an incredible 32% earnings beat that has investors lauding them with praise—and a higher share price. But with a Growth Score of “A” and Value Score of “B” it says this poultry producer is no turkey. 

These stocks may lack the sex appeal of other growth-oriented industries; however, when the economy softens, so too does the growth outlook and those stocks with more sizzle end up with the greatest losses. Sometimes the boring choice is the right choice. So consider adding a slice or two of these boring stocks to your portfolio during this trying time for the stock market.

About the Author

Steve Reitmeister is the executive vice president at Zacks Investment Research at zacks.com. The cornerstone of the firm is the Zacks Rank stock rating system and its 26% average annual return since 1988. These results have been examined and attested to by the independent accounting firm Baker Tilley. @ZacksResearch