The consumer might be ready for a comeback—and consumer stocks with them. The key is finding ones that are still cheap and still have a bright profit outlook.
Consumer stocks have been having a rough year. You wouldn’t know it by looking at the
Consumer Discretionary Select Sector SPDR exchange-traded fund,
which has gained 31% in 2023, thanks to large stakes in
Invesco S&P 500 Equal Weight Consumer Discretionary ETF,
though, has risen just 9.3%, underperforming both the Discretionary ETF and the
because it reduces the weights of the two discretionary titans in favor of companies like Garmin, Starbucks, and
Chipotle Mexican Grill.
A lot changed with the release of October’s consumer price index on Tuesday. Both headline and core CPI, which strips out food and energy, came in below expectations, providing more evidence that the Federal Reserve should remain on hold when it meets again in December. At the same time economic growth continues to hold up, even if it looks set to slow from a robust third quarter reading. The one downside: Wednesday’s retail sales are expected to fall 0.3% in October, down from 0.7% in September. Slower inflation, though, could take some of the pressure off consumers and enable them to spend more on the stuff they want, not just what they need, and the Equal Weight Consumer Discretionary ETF has jumped 3.7% in just two days this week.
That might make shares in consumer discretionary companies—the ones not named Tesla and Amazon—a good bet right now. But it still pays to be selective. That’s why Evercore strategists screened for Russell 1000 consumer discretionary stocks that are still cheap both relative to the sector based on 12 month forward earnings estimates and their own five-year averages, and earnings estimates for 2024 that have been revised higher. Some names on the list include home builder
MGM Resorts International,
Two in particular stand out.
trades at just over 10.4 times next year’s earnings per share estimates, below its five-year average of about 30 times. It’s become cheaper even though analysts have lifted their 2024 estimates by almost 7%, to $12.11, according to FactSet. Some of the lift to those estimates happened in early November after the company reported third-quarter results. Bookings grew and sales increased to $3.92 billion, above expectations for $3.39 billion, led by a higher-than-expected take-rate on travel bookings. The sales growth, combined with continued share buybacks, was enough for earnings to grow to $5.41, well above analyst forecasts for $4.96, even though margins narrowed. Even though the stock has gained 29% this month, there could be more upside ahead.
is also on the list. It’s had a tough year—the stock is down 15%—but now trades at 15 times, below its five-year average of about 22 times. Analysts have lifted their 2024 earnings estimates by about 3% this year to $26.75. And no wonder: Ulta has beaten sales and earnings estimates every quarter this year. Profit margins haven’t moved much this year as the company has ramped up investments, but those costs should come down going forward, writes D.A. Davidson analyst Michael Baker, while the benefit of those investments can start to roll in. Analysts expect 5% sales growth next year to about $11.6 billion, according to FactSet, led by continued growth of e-commerce revenue. For the next four years, sales can keep growing and earnings can grow at about 13% annually to over $37 by 2027.
Write to Jacob Sonenshine at [email protected]