Thematic investing has become hugely popular with both retail and institutional investors alike. Studies show that this type of investing can generate alpha that’s potentially greater than traditional investment frameworks using asset classes to form the foundation of an investment portfolio.
It’s become so popular that firms like Motif Investing have sprung up catering to investors’ desire to bet on specific themes rather than traditional sectors. Millennials is a hot one right now; Motif has a portfolio for this theme and many others.
But that’s not what this article is about.
No, I’m interested in finding consumer stocks that can do well in good times or bad, and while your first inclination might be to consider consumer staples stocks to fill this need, they don’t always do well in strong economies.
So, if not consumer staples, then surely consumer discretionary stocks will do the trick. These also have their flaws, as we’re seeing in 2016 with the S&P 500 consumer discretionary sector down 0.5% through June 13. That’s in comparison to 1.7% for the index itself and 5.7% for the S&P 500 consumer staples sector.
Forget traditional sector classifications.
I’m simply interested in consumer stocks that can get the job done. While I don’t have a crystal ball, let me explain why I think these are the three consumer stocks to buy now.
Consumer Stocks to Buy Now: Under Armour Inc (UA)
They say people cut back on certain types of spending in tough economic times. In the last recession, people cut back on gym memberships and other expensive forms of exercise and went into survival mode.
According to a Wall Street Journal article from 2009, an operator of higher-end gyms saw 40.2% of his members quit in 2008 alone. In the same piece, the Journal reported that sales of elliptical machines and other types of home equipment declined by 10% in that same year.
People just stop spending money … well, almost.
In the recession years of 2008 and 2009, Under Armour Inc (UA) saw its revenues increase 41% on a cumulative basis from $607 million in 2007 to $856 million at the end of 2009. Despite one of the toughest recessions in the history of the United States, here was a fitness company growing at an amazing clip.
Sure, you can make the case that its operating income basically remained flat over those two years, but it still managed to deliver operating profits of $86 million, $77 million, and $85 million in 2007, 2008 and 2009, respectively.
People might stop going to the gym or buying a fancy treadmill, but they still have to exercise and get outside. Under Armour was there to take care of them, despite having less discretionary income to spend. Fast-forward eight years and people have become much more concerned about their health and fitness. As a result, Under Armour’s revenues and operating profits have grown almost four-fold in that time.
In order to continue its growth, UA is making big moves into retail and opening its own stores so that it can go directly to consumers. Certainly, the negative blowback (and $23 million write-down) from Sports Authority’s bankruptcy has Kevin Plank and company questioning the financial strength of its other wholesalers. Still, its move to open more of its own stores gives it more control over its overall business.
Good times or bad, Under Armour is going to be in the thick of things when it comes to fitness apparel and footwear. I like UA stock over the long haul.
Consumer Stocks to Buy Now: Walt Disney Co (DIS)
Eventually working a deal that means sharing profits with the Chinese government, the new park will be four-times the size of Disneyland. In return, DIS gains access to 330 million people living within a three-hour drive of the Shanghai Disney Resort.
The future revenue those consumers will generate from all its various products and services is virtually endless.
CEO Bob Iger has put his legacy at Disney on the line with the Shanghai resort, and while skeptics exist, the fact that he’s been able to stickhandle DIS to an annualized total return of 15.7% since he took the top job in October 2005 — the SPDR S&P 500 ETF Trust (SPY) earned 7.2% in the same period — tells me he’s earned the right to make these big decisions for shareholders.
What you get with DIS compared to other media conglomerates is a bunch of working parts that act as a team. The movies support the resorts, which support the products and retail stores, which support the cable and broadcasting.
They’re all united under the Disney umbrella. It’s diversification that works.
And it’s exactly what Sumner Redstone wished he had with CBS Corporation (CBS) and Viacom, Inc. (VIA, VIAB). Unfortunately, family bickering and poor decisions have scuttled any opportunity of duplicating Disney’s level of success. As much as I respect the job Les Moonves has done at CBS, it isn’t half as good as Iger’s work at DIS. That’s not a slight against Moonves; it’s a compliment to Iger.
The future of Disney is in good hands thanks to his leadership.
Consumer Stocks to Buy Now: Starbucks Corporation (SBUX)
It’s hard to believe, but Starbucks Corporation (SBUX) stock is down 7% year-to-date through June 15. It hasn’t had a down year since 2008 when it lost 54% of its value on top of a 42% decline the year before. Young investors probably don’t remember that CEO Howard Schultz, so synonymous with the brand, wasn’t actually running the company when it ran into trouble back in 2007.
At the time of the decline, former CEO Jim Donald was under control, having been promoted to the job in 2005. By January 2008, Starbucks’ board had seen enough, asking Schultz to return to the top job. Schultz promptly got to work fixing the Starbucks experience.
While there have been bumps along the way, including this year’s revamping of the Starbucks loyalty program, the results of his handiwork speak for themselves. SBUX stock is up 24.8% on an annualized basis since Schultz took back the CEO title.
It’s hard to argue with success. But it’s the future that investors are concerned about.
Well, as it continues to rollout beer and wine across the country and in Canada too, its solution for the slowest daypart in the company’s business strengthens by the day. It’s called proactive management.
Barron’s just came out with a very favorable article about Starbucks’ same-store sales that suggests it will continue to deliver mid-to-high-single-digit growth at its locations open for more than a year. The paper found Starbucks had lost no business due to the changes in its loyalty program. Not a surprise, really.
They simply made the program fairer. On the grocery shelves, it’s also kicking butt and taking no prisoners and in the process, capturing market share. With its deal to sell coffee pods for the Nespresso home brewing machine made by Nestle SA (ADR) (NSRGY), Starbucks gains a foothold in the European brew-at-home market.
Look no further than its Q2 2016 results for assurances that Starbucks still has growth ahead of it. In the second quarter, it generated a record $5 billion in revenue and $864 million in operating income. It expects to open 1,800 net new stores in fiscal 2016, all of which are going to help generate the estimated revenue growth of 12% year-over-year. Operating margins are expected to increase slightly leading to an estimated non-GAAP fiscal 2016 earnings per share of at least $1.88. That’s a forward price-to-earnings ratio of 29.
You might not like paying this type of multiple, but sometimes it’s okay to pay up for quality. When it comes to consumer stocks, you’re not going to get any better.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.