October is already proving to be another volatile month in the markets, unnerving most investors. Therefore, I’d like to discuss three consumer stocks that I believe may be suitable for many long-term portfolios.
The stocks to buy include Costco (NASDAQ:COST), Diageo (NYSE:DEO) and McDonald’s (NYSE:MCD). Over the next several decades, the global population is expected to grow by at least a billion people. Therefore, when it comes to investing for the long run, following the consumer will likely offer stable returns for the average investor.
Meanwhile, if you are of the opinion that an economic slowdown may be almost upon us, you may want to reconsider your portfolio diversification strategies. Certain industries and stocks tend to do better in times of slower economic growth. A healthy starting point is looking at companies with a track record of success that will still be in-demand in the future. In the coming weeks, we can possibly expect price choppiness in COST, DEO and MCD stock, too. But any profit-taking in these stocks could be a sign to investors to consider buying into the shares.
With all of that in mind, lets dive a little deeper into each of these consumer stocks and determine what exactly makes them ideal stocks to buy now.
Consumer Stocks to Buy: Costco (COST)
Notable tailwind catalysts: Defensive stock, straightforward annual membership business model and dividend
Expected price range until next earnings in January: $270-$290
If you believe in holding shares for the long term, I’d suggest that you take a closer look at Costco, the second-largest global retailer by revenue. Costco operates in the warehouse club (or wholesale club) space within the retail industry.
Due to the low-cost and high-value products offered by warehouse clubs, this sector usually performs well regardless of macroeconomic conditions.
Costco runs on a subscription business model, whereby customers pay an annual membership fee to have access to its bargain-priced bulk goods. By using a membership-only system, COST stock is able to book nearly all of its profits one year in advance.
Revenue is a direct function of the number of members it has. In other words, the annual membership model contributes to its operating income and gives Costco stock immense earnings stability.
Year-to-date, COST stock is up about 41%.
However, on Oct.4, Costco stock reported mixed Q4 earnings. The group achieved $47.50 billion in revenue, just shy of Wall Street’s expectation of $47.57 billion.
On the other hand, net income was $1.09 million, or $2.47 a share, compared to the $1.04 million, or $2.36 per share a year prior.
Therefore, there may be some profit taking in the shares in the short-run. But such a decline would offer a better entry point for investors.
Notable tailwind catalysts: Strong brands, global diversification and dividend
Expected price range until next earnings in January: $145-$165
With its diverse global exposure and brand portfolio, Diageo shares offer long-term growth potential. Such geographic diversification — especially into emerging economies, where consumers are increasingly showing brand loyalty — provides a relatively defensive investment opportunity.
In a 2018 research report, Jean-Marie Cardebat and Linda Jiao of University of Bordeaux in France discuss the increasing consumption levels of alcohol, especially wine, in emerging markets.
The strong brand names of Diageo contribute to increased volume growth in most markets and gives management pricing and competitive power within this non-cyclical market. The group has over 200 strong brands, including Baileys, Don Julio, Guinness, Johnnie Walker and Smirnoff.
In July, DEO stock delivered robust organic net sales growth of 6.1%. Organic operating profit also increased by 9%. Africa, Latin America and Asia Pacific regions all contributed strongly to the results.
Year-to-date, Diageo share price is up about 14%.
Public health warnings against and higher taxes on alcohol in many jurisdictions are headwinds for alcohol companies. Yet Diageo is continually growing revenues and the company’s fundamental story remains intact.
Notable tailwind catalysts: Global brand recognition, rental income portfolio and dividend yield
Expected price range until next earnings in October: $200-$210
McDonald’s operates in the fragmented food service industry. Its competitors include Restaurant Brands International (NYSE:QSR), Starbucks (NASDAQ:SBUX) and Yum Brands (NYSE:YUM). It has over 36,000 restaurants in over 100 countries.
On July 26, McDonald’s reported mixed Q2 results. Yet in recent quarters, in addition to the acceleration of U.S. sales, MCD stock has benefited from international growth, mostly thanks to promotions, mixed-priced deals as well as renovated stores.
Over 90% of the restaurants are currently franchised. The franchising business gives McDonald’s a significant competitive edge as the initial franchise fees and on-going royalties mean high margins. Its operating margins now stand around a healthy 30%. Franchisees carry the operating costs and business risks. Thus McDonald’s does not have to worry about the expenses of running those operations.
The group — globally recognized as “the Golden Arches” — also collects rent from the franchisees. The company owns most of the properties where the restaurants operate. Then it leases those out to the franchisees, often at significant markups. It may not be wrong to say that the company is in the real estate business as much as food services.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.