By The consumer market is poised for a resurgence, and this could mean good news for consumer stocks. The key to success lies in identifying stocks that are not only affordable but also offer great profit potential.
Consumer stocks have faced challenges in the past year. However, the performance of the Consumer Discretionary Select Sector SPDR exchange-traded fund tells a different story. With a 31% gain in 2023, largely due to its investments in Amazon.com and Tesla, it has outperformed expectations. On the other hand, the Invesco S&P 500 Equal Weight Consumer Discretionary ETF has only risen by 9.3%, lagging behind both the Discretionary ETF and the S&P 500. This is due to its focus on companies like Garmin, Starbucks, and Chipotle Mexican Grill, rather than the industry giants.
The release of October’s consumer price index brought about significant changes. Both the headline and core CPI came in lower than expected, suggesting that the Federal Reserve should maintain its current stance when it meets in December. Despite concerns about a possible slowdown after a strong third quarter, economic growth remains steady. The only downside is the anticipated decline in retail sales for October, projected to be 0.3% compared to September’s 0.7%. However, with reduced inflationary pressures, consumers might have more freedom to spend on desired items rather than just essential ones. This has already had a positive impact, with the Equal Weight Consumer Discretionary ETF experiencing a 3.7% increase within two days this week.
Consequently, now could be an opportune time to invest in consumer discretionary companies, excluding Tesla and Amazon. Nevertheless, it is important to exercise caution and select carefully. Evercore strategists have conducted a thorough screening process, identifying Russell 1000 consumer discretionary stocks that are currently affordable based on sector earnings estimates for the next 12 months and their own five-year averages. Additionally, they have focused on stocks with revised higher earnings estimates for 2024. Notable names on their list include D.R. Horton, a leading home builder, General Motors, one of the key players in the automotive industry, MGM Resorts International, a renowned casino operator, and Williams-Sonoma, a reputable retailer.
Expedia Group
Expedia Group, one of the standout companies, is currently trading at just over 10.4 times next year’s earnings per share estimates, which is below its five-year average of about 30 times. Despite this decrease in valuation, analysts have actually raised their 2024 estimates by almost 7%, now projecting $12.11 per share, as reported by FactSet.
One significant boost in estimates occurred in early November after the company released its third-quarter results, demonstrating growth in bookings and sales. Expedia Group recorded sales of $3.92 billion, surpassing expectations of $3.39 billion. This growth was predominantly driven by a higher-than-anticipated take-rate on travel bookings. Despite the narrowing of margins, the combination of increased sales and ongoing share buybacks resulted in earnings reaching $5.41 per share. This figure significantly exceeded analyst forecasts of $4.96 per share. Despite experiencing a 29% increase in stock value this month, Expedia Group may continue to see further upside potential.
Ulta Beauty
Ulta Beauty is another company worth mentioning. Although its stock has declined by 15% over the course of the year, it currently trades at 15 times earnings, below its five-year average of about 22 times earnings. Analysts have revised their 2024 earnings estimates by approximately 3% this year, now projecting $26.75 per share.
The solid performance of Ulta Beauty can be attributed to consistently surpassing sales and earnings estimates each quarter throughout the year. While profit margins have remained relatively stable due to increased investments, D.A. Davidson analyst Michael Baker suggests that costs will gradually decrease going forward, leading to positive outcomes from these investments. According to FactSet, analysts anticipate a 5% sales growth next year, reaching approximately $11.6 billion, primarily driven by the continuous expansion of e-commerce revenue.
Looking ahead, sales are expected to continue growing for the next four years, with earnings projected to increase annually by approximately 13% to over $37 per share by 2027.
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