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In part one of this series, we came up with several technology stocks that I have deemed worthy of selling in anticipation of a market pullback. We have established that their gains were due (in part) to the market's "rising tides." For similar reasons, in part 2 we identified 5 financial stocks that may see a near term pullback and then it was followed by a look at healthcare. In this piece, we are going to look at the consumer staples sector and see which firms may suffer a near term pullback. As with the previous pieces, we started with some basic understanding.

You'll always know that you are in a bull market whenever each trading day follows one where records and weekly, monthly and yearly highs are always mentioned. Where earlier this week both the Down and S&P500 reached key decade-old milestones and yet another on Friday as the Dow surged higher closing near its 4-year high. However, this time it was the Nasdaq's turn after it index hit an 11-year high. This time the optimism was spurred job growth. The U.S. economy created jobs at the fastest pace in nine months in January and the unemployment rate dropped to nearly a three-year low of 8.3 percent, the government said.

Still not convinced we are in a bull market?

Consider this, across all of the sectors trading on the market, there has been 450 separate stocks that have recently reached 52-week highs. This is the highest reported total since last July. In 2012 so far, it seems to be an everyday occurrence. Aside from a company such as Apple (AAPL) which continues to rise and will likely do so through the quarter, while looking across all of the indices, the signs of being overbought was apparent on a great majority of the stocks that are showing such momentum. A recent analyst suggested that 74 percent of stocks were over their 200-day trading averages. The question now becomes, is it time to be fearful in the market if you follow the preaching of Warren Buffett?

S&P500 YTD3.jpg

Clearly the year to date sector performance above shows that investors are not only excited about what lies ahead in 2012, but have become decisive about what industries matter the most. So again, with such early gains and with the broader indices having approached record territories, should investors be in a fearful mode and begin to lock in some profits as the bear market may just be around the corner? This question is not that difficult to answer if one has studied recent history.

Trading the sector gains

They say "a rising tide lifts all boats." There is unquestionable truth in this theory, especially in the stock market, as evident by this bullish run we are now seeing. So when it comes to stocks, we need to understand that a strong economy can propel even the most challenged business models.

In this article, which is the fourth in the series of looking within each sector, we are going to try to identify certain consumer staples stocks that might be on the verge of a pullback and ways to possibly mitigate some risk and exposure to losses. The benefit of this is that if you are on the sidelines, hopefully you will be able to get an idea of a possible good entry point.

Trading consumer staples

McDonald's (MCD)

The first stock within this sector that I'm going to discuss is one of the hottest, McDonald's. Its valuation has long been off "the dollar menu" and it appears that investors are just "loving it." In remarkable fashion, it seems that the stock hits a new 52-week high at least once or twice per week. But the clear and obvious question is, should now be the time to push away from the table? Or in other words, lock in some profits? The answer is yes.

However, the interesting component to the stock's rise is that unlike several of the others that we have discussed, its rise has not been as swift - an observation that makes me think that even if the market corrects, it may not suffer any significant pullback as its current valuation of $100 is also its 50-day average while its 100-day average rest at $95 per share. For this reason, McDonald's continues to be one of the safest bets on the market, but with a P/E of 18, it's hard to call the stock cheap which makes a $5 to $10 correction more than reasonable an expectation.

Rite Aid (RAD)

The stock of troubled retail drug outlet Rite Aid is up 36 percent over the past three months - including a 20 percent gain on the year. The problem is, nobody has been able to figure out why. The company is still in deep trouble although it has been working to reduce and refinance its debts. It has instituted programs for increasing sales along with closing some stores, but has not been able to generate any profits, and it there is little confidence that it can.

Since bottoming out at $0.85 cents on October 4, it has been one of the hottest stocks on the S&P500. The pessimist within me thinks that the stock should be sold before Mr. Market realizes its error and comes to its senses. The irony is that for a pharmacy that sells products that heals sicknesses, it has not been able to nurse itself back to health and it doesn't appear that this year will be any more prosperous. Although, its recent stock performance would lend you to think differently. It should be sold until fundamental reasons for its recent climb is made apparent.

Winn-Dixie (WINN)

Grocery store chain Winn Dixie is likely one of the hottest stocks that most investors have never heard of. The stock is up over 50 percent of the last 3 months, but unlike Rite Aid, there is clear evidence as to why. The grocery giant recently instituted multi-year plans to upgrade several of its stores, and it appears be gaining traction in that endeavor. It recently reported its Q1 fiscal 2012 results that demonstrated just how focused and effective the company's goals have been.

Winn Dixie delivered a same store sales increase of 3.3 percent while overall net sales increased 3.1 percent to $1.6 billion compared to the year ago quarter. Sales growth helped Winn Dixie report a loss of $24 million, significantly less than the $77 million loss in the year ago period. The company has a solid balance sheet that should allow investors some peace of mind over the long term as management continues to transform its stores. However, in the near term, a jump of 50 percent in valuation is no small change. As the stock is only percentages away from its 52-week high of $10.08, its 200-day average is $7.50 and presents a reasonable (temporary) pullback level.

Wal-Mart (WMT)

Retail giant Wal-Mart is up 30 percent since hitting its 52-week low of $48.31 on August 10 of last year. However, unlike some of the other stocks on the market, it is hard to consider that it can fall prey to any sudden bearish turn since one of its qualities is its ability to thrive in any type of market by virtue of its reputation for offering consumers the lowest prices. So it stands to reasons that if the economy makes a turn for the worst, Wal-Mart will still remain one of the most visited retail destinations.

Having said that, (and for some of the same reasons mentioned above) its 30 percent gain remains glaring and add to the fact that it is right at its 52-week high makes it very likely that investors may chose to lock in some gains at some point - if not sooner. But for Wal-Mart, the downside risk is minimal as the stock is only 3 and 8 percent above the 50-day and 100-day averages respectively.

Best Buy (BBY)

Best Buy is in trouble. How's that for stating the obvious? It seems to me that the company has placed its focus more on Amazon's (AMZN) perceived competitive advantage rather than on its own fundamental challenges. I'm probably several weeks late in saying this, but the stock should be sold. Even with its recent declines of 30 percent since last July, there is still some downside left (in my opinion) below $20.

In a recent article, Fellow Seeking Alpha contributor Rocco Pendola explained exactly why Best Buy's better days are a thing of the past as he offered three compelling reasons. But one of the points that resonated with me was his final thought on the topic, in which he said:

If the RadioShacks (RSH) and Best Buys of the world want to shed their present wretched existences, they'll need management teams ready to circle the wagon with more than memos to the media and howls about price checker apps and sales taxes. Instead, they have to start stepping out in front, not letting the competition dictate the terms of engagement and, once and for all and last but not least, innovating. Until RadioShack, Best Buy or one of their similarly-positioned counterparts show this type of forward-looking pluck, I will not touch their "value" stocks with your smart phone's quick response code scanner.

The sad reality for both Best Buy and Radio Shack is that, what Rocco has pointed out above is not likely to happen - which is the reason why I tend to think that the days of both retailers are numbered and will likely suffer the same fate of Circuit City and CompUSA before them.

Summary

Thank you for reading the consumer staples stocks in part 4 of this series, In the next piece we will investigate the energy sector and see which stocks might be on the verge of a pullback.

Source: 5 Consumer Staples Stocks To Unload Before They Drop