Inside Out: Consumer Staples Midyear Outlook, COST & WMT Bullishness

invest smarter with Schwab. We are back on Morning Trade Live looking at some of the major retail staples stocks this morning. We've got Walmart and Target fractionally higher. Costco is lower. So are the dollars. Dollar general Dollar Tree but pretty much range bound you could say on some of these retail staples today going in opposite directions, but not a huge amount to write home about as far as the performance today. But you know, consumer staples, that's experience a pretty strong performance as far as the turnaround in 2026. So let's talk about this. The broader staples sector and Walmart in particular. Joining us now is Arun Sundaram, who's the senior vice president of equity research at Cfra. Good morning to you, Arun, and happy Friday. So as I said, you know consumer staples this sector has done okay this year. I mean, particularly compared to previous years, some had been talking about it being a catch up trade in early 2026. You've got a market weight recommendation on the sector right now, which I believe is what equivalent to a sort of a hold or a neutral rating. Yeah. Yeah. That's right. Yeah. We've had a market weight recommendation on staples for, for a few years now. We don't we don't love it. We also don't hate it. You know, obviously it's a very defensive sector. The sector, you know, many companies, many stocks in the sector have high dividend yields, which is just not, you know, as attractive these days when you have Treasury yields where they are today. And, you know, the sector also is trading at a forward p e of about 22 times. The S&P 500 is trading at a forward p e of about 21 times, a little bit more expensive than the overall market. Even even information technology is trading at 22 times forward earnings. So and it's hard to really argue that staples has better growth prospects than, than tech out there. So yeah, we have a market rate recommendation. Most subindustries within the sector we are neutral to negative on, but we are positive on two subindustries within the sector. One is consumer staples, merchandise retail, which is where Walmart and Costco reside. And we have a buy rating on both of them. And the other Subindustry is agricultural products. Archer-daniels-midland and Bungie Company. We have a buy rating on those two agri businesses as well. Okay, let's dig into Walmart because I mean, that's delivered a pretty flat performance overall this year. Just looking at the year to date chart. I mean what's going on here do you think. Yeah yeah. It's been you know not not as strong of a performer as we thought this year. We did have a strong buy rating on Walmart earlier this year. We did downgrade it to a buy from a strong buy rating. And one of the biggest reasons is I mean, the stock is is expensive. You know, when you're looking at forward p e multiples at Walmart and it's about, you know, 35, 40 times it's even higher for Costco. So the valuation was always tough to, to tough to defend. We've been defending the premium multiple for many years now. But it's really tough to, to, to, to defend a multiple above 4550 times forward earnings. But we still do like Walmart and Costco. You know, we have buy ratings on both of them. You know, both these retailers, not only are they growing their top line very well, but they're also expanding their margins. And one of the reasons why is because, you know, these are not just retailers that sell groceries anymore. They're getting into these higher margin businesses as well, like selling advertisements on their website. These are, you know, much higher margin revenue streams for these type of companies. And that's allowing them to keep their prices low in their stores, but also expand their, their bottom line margins, which is, you know, I think a big positive. And so I think over the next few years, we'll likely see double digit earnings growth for, for for Walmart, for Costco. And I think that supports that premium multiple for, for those stocks. Okay. And obviously they're doing a lot around AI at the moment as well. You've got these consumer trends of, you know, people, high income earners are trading down as well, which they continue to benefit from. You mentioned the ag products companies, I mean, relatively small subindustry as far as the sector weighting. But just walk us through some of those names you mentioned and why you like those. Yeah, it's I think it's an often overlooked area of consumer staples, agri businesses in general. You know, they're I know, I call them almost like the, the invisible middlemen between the farmers. And, you know, what ends up in your dinner plate? They buy very, very large quantities of crops from, from farmers, you know, corn soybeans wheat they move these crops all around the world. So typically when there's, you know, geo geopolitical tension risks, like what we're seeing right now, they tend to perform better because they're able to move crops around into different parts of the world. And then they also process these crops. You know, they, they turn soybeans into, into cooking oil. They turn corn into sweeteners, wheat into flour, things like that. And right now there's a there's a significant secular tailwind benefiting these agribusinesses. And that's because the US, as well as other countries around around the world are really pushing out favorable biofuel policies, given where oil prices are today, biofuel policies are becoming more favorable in the US as well as other other parts of the world. So that's really good for vegetable oil, which is what these companies produce. So they're seeing strong margins because of the strong end demand for for vegetable oil. They're also seeing strong ethanol margins. They produce ethanol as well. They also, you know, they export crops to China. And actually China is importing a lot more crops, or China is buying a lot more crops from the United States this year. Last year was essentially, you know, almost zero because of the trade situation. But this year they're China is buying a lot more. So the the operating environment is, is looking very favorable for, for these agri businesses. And that's why we have a buy rating on Archer-daniels-midland and, and Bungie. Yeah. Bungie up 35% over the last 52 weeks. Really appreciate it. Arun Sundaram, their senior vice president of equity research at Cfra. Thank you so much for your time. Let's trade Walmart now with Tom white, host of Fast Market. Good morning Tom. Happy Friday. Just walk us through an example trade. Yeah Walmart's been an underperformer. Everybody keeps talking about the resiliency of the U.S. consumer. But it's not showing up in Walmart. As far as the price action goes. Stocks are relatively flat this year, down about 17% from those all time highs that we saw in May right ahead of earnings. Now they report earnings on the 20th of this month. So we might get some clarity if we've seen a pullback higher. I think one of the concerns has been valuation on Walmart. It's at or near historical highs going into that last earnings report. And that's probably why you're seeing the pullback as margins have been under pressure just a little bit here. So if you think if you're bullish you think this stock's going to rebound. I looked at a strategy that takes advantage of that. Not a lot of implied volatility in Walmart. Typically even going into earnings. It's relatively a slow mover as far as beta goes. So I looked at a directionally biased trade. But I gave myself some duration about a month and a half in this position. I went out to the September monthly option. So you'll capture that earnings event on the 20th of this month and give yourself a little bit more duration buying the in the money 110 strike calls and then against it to offset some of the costs, sell the 125 strike call. So a bullish $15 wide call vertical. You're paying roughly about a 470 debit on it. It might be about a dime higher than that. The stock has continued to bounce off of session lows here. But if you pay that 470 debit that's your risk 470 bucks. You can make just over $1,000 per spread. If the stock gets back above 125 over the next 44 days into September expiration. Now this has a delta of about 45. So for every dollar move in Walmart shares, this vertical would expand by $0.45. Your break even on it. One 1470 to the upside. That's less than 2.5% above the current share price. So it's well within the one standard deviation move that the option market's pricing in going into earnings. And you're giving yourself that a little bit more duration. You're giving yourself 44 days in this position. So this might be the way to look at it. If you expect the stock to kind of rally post earnings. But even if it doesn't, you still have a lot of time in this one. And it gives you some flexibility as far as trade management. You don't have to wait until September expiration over the next month and a half to get out of this trade. If it starts to expand in price, it gives you a little bit of flexibility as far as closing ahead of expiration. All right. Thanks so much for that, Tom. W