Grocery Outlet, Honest rally on small-cap staples rotation

The backdrop is a market that has recently favored growth and risk assets, aided by lower oil prices and softer bond yields, while staples momentum has remained mixed. In that environment, the smaller names have become a proxy for investors willing to take on more idiosyncratic risk in exchange for potentially faster earnings and price recovery.

Grocery Outlet, ticker GO, has seen its shares rise to $11.27 from $9.42 on July 27, with the stock briefly touching $11.70 in late August. It remains above both its 50-day moving average of $10.63 and its 200-day average of $9.28, a sign the trend has improved even after a recent pullback. The stock’s relative strength index has cooled to 36.9 from an overbought 87.9 in mid-August, while volume surged to 3.6 million shares on Sept. 18, suggesting the name is still drawing active trading interest.

That move is important because Grocery Outlet’s underlying business is still defined by pricing pressure and heavy competition. In its most recent filing, the company said promotional and pricing activity from key competitors has increased, putting pressure on its value proposition. It also reported first-half gross margin of 29.9%, little changed from 30.5% a year earlier, underscoring that the stock’s strength is currently being driven more by momentum and expectations than by a clear fundamental breakout.

Honest Company has been an even more dramatic rebound trade. The stock climbed from $2.63 in early March to $5.33 on Sept. 18, after peaking near $5.95 in early September. It now trades above its 50-day moving average of $4.79 and well above its 200-day moving average of $3.43, a technical profile that has drawn momentum screens back to the name. The recent RSI reading of 39.2 shows the stock has backed off from overbought conditions, but it remains far stronger than it was earlier this year, when the RSI sank to 10.3 and the shares traded near $2.33.

For investors, the challenge is distinguishing between a genuine inflection and a relief rally. Honest’s latest 10-Q showed revenue pressure from the discontinuation of its direct shipping channel and a 15.4% decline tied to strategic exits and weaker diaper sales, partly offset by growth in wipes and personal care. Management has argued that those changes should improve gross margin over time, giving bulls a cleaner, higher-quality business model to underwrite. Bears, meanwhile, can point to a stock that has already moved sharply despite a business still in transition.

The broader setup favors selectivity over blanket exposure to staples. Large-cap defensive names have struggled to generate the same momentum, while smaller consumer brands tied to operational fixes, channel shifts or share gains have attracted the market’s attention. If the risk rally broadens and macro conditions remain stable, the technical leaders in small-cap staples could keep outperforming. But if inflation, bond yields or consumer demand turn less favorable, the same names could give back gains quickly, especially where the fundamental recovery is still only partly visible.