Stay away from food stocks — they’re just a bunch of crowded trades: Strategist
by Annie Pei

Food stocks have offered investors scrumptious returns this year, but in spite of the run, some traders think that they're not worth digging into.

Larry McDonald, managing director and head of global macro strategy at ACG Analytics, believes the massive run in some food stocks is a result of their high dividends, and consequently, have become "crowded trades" in a world of low yields.

"Central bankers are driving capital into places it just shouldn't be. People are using these types of stocks as bonds," he said on CNBC's "Trading Nation" Thursday. "You have investors all around the world flocking to the United States trying to get some income and it's just a very, very crowded trade."

And apparently, the crowd is willing to pay. Kraft Heinz trades at a multiple of 33. Campbell Soup and Kellogg command respective multiples of 22 and 21. Meanwhile, the S&P 500 trades at 17 times earnings.

But despite the lofty valuations for those particular stocks, Ari Wald, technical analyst at Oppenheimer & Co., still remains bullish on stocks in the consumer staples ETF (XLP), which includes those particular stocks. Displaying a long-term chart of the XLP, Wald shows that the ETF broke out in March and is in a position to do the same again.

"We think [the consumer staples] continue to work," he said. "In general as long as rates are low, you're going to continue to have this premium placed on the higher-dividend stocks like consumer staples that act as a bond proxy. And we really aren't seeing much signs of rates turning up."

One stock Wald is watching in the same sector is food companyGeneral Mills, which boasts trends that he sees mirroring the XLP.

"[General Mills is] very similarly set up here as well with the breakout in March consolidating sideways," he said. "Stocks like these continue to work."

Courtesy of cnbc.com