6 Best Consumer Services Stocks to Buy as the Economy Rebounds

Services stocks - 6 Best Consumer Services Stocks to Buy as the Economy Rebounds

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Over the past two years, the global economy has been in a synchronized slowdown, as escalating U.S.-China trade tensions have weighed on economic confidence and activity everywhere. According to the International Monetary Fund, the global economy is projected to grow by just 3% in 2019 — its slowest growth rate since the global financial crisis.

But, things have changed in a big way over the past few months.

U.S.-China trade tensions have lessened as both sides agreed to work on striking a series of “mini” trade deals. Ostensibly, this de-escalation seems permanent. The United States is unlikely to up the trade ante in 2020 with President Donald Trump heading into a re-election campaign, while China is equally unlikely to up the trade ante because its economy has just started to find its footing.

Given those favorable trade optics, global corporate confidence — which was dented big in the trade war — should now rebound. As it does, economic activity should re-accelerate higher, and the global economy in 2020 should be a lot stronger than it was in 2019.

That’s why U.S. stocks have surged to all-time highs in late 2019.

One group of stocks that look particularly good amid this economic resurgence? Services stocks. The services economy was never hit that hard by the trade war. Non-manufacturing Purchasing Manager Index surveys showed that the services economies in America, China and elsewhere all continued to expand during the trade war.

But, there were signs that the services sector was starting to feel trade war pain in August and September. Services stocks were killed in response. Now, though, trade war headwinds are disappearing. As they do, the temporary services economy slowdown will end.

When it does, services stocks will rebound in a big way.

Best Consumer Services Stocks to Buy: The Trade Desk (TTD)

STARS Stocks to Buy for the Long Run: The Trade Desk (TTD)

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Percent off 52-Week Highs: 19%

Programmatic advertising leader The Trade Desk (NASDAQ:TTD) has seen its stock get slaughtered over the past few months amid a broad rotation out of momentum stocks and into value stocks.

This rotation is nothing out of the ordinary. It tends to happen every time the economy breaks out to the upside following a period of stagnation. During the period of stagnation, investors do not have broad confidence in the economy, so they pile into stocks that already have a ton of momentum. This leads to overcrowding in momentum stocks, and this overcrowding ends when the economy improves and investors re-allocate their money back into the rest of the stock market. That’s why TTD stock presently trades about 20% off its high, while the S&P 500 is at record highs.

Zooming out, all of this momentum-to-value shifting is just noise. It will pass. When it does, the attention will return to the fundamentals, which for The Trade Desk, remain rock solid. The automation trend is gaining momentum, especially in the digital ad world. Advertisers are increasingly adopting The Trade Desk’s programmatic advertising solutions to automate and optimize their ad transaction processes.

Consequently, as the attention returns to the fundamentals over the next few quarters, TTD stock will rebound in a big way.

Chegg (CHGG)

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Percent off 52-Week Highs: 23.4%

Another stock which has been killed almost entirely due to the momentum-to-value shift is connected-learning platform Chegg (NYSE:CHGG).

Chegg is a strong growth company. It is in the early innings of disrupting a huge education industry that is one of the few remaining industries that has yet to be digitized. In this disruption process, Chegg has created an on-demand, connected learning platform that high school and college students across America are increasingly adopting. This is a software subscription business, so revenues are both predictable and high margin. Further, competition is muted by Chegg’s better-than-peer network effects. Because it has more students, it attracts more tutors, which attracts more students, so on and so forth.

Those solid fundamentals have powered CHGG stock from $4 in early 2016, to nearly $50 earlier this year.

Strong third-quarter numbers underscore that those same fundamentals remain in place today, and that this growth narrative is hardly slowing. Yet, CHGG stock has dropped from nearly $50, to near $37. Why? Noise from a momentum-to-value shift, and nothing more.

As this noise phases out over the next few quarters, CHGG stock will rebound back to all-time highs.

Chipotle Mexican Grill (CMG)

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Percent off 52-Week Highs: 10.4%

For most of 2019, fast-casual Mexican eatery Chipotle Mexican Grill (NYSE:CMG) could do no wrong. Every new menu item the company added was a huge hit. Every new marketing campaign resonated with customers, every new loyalty program saw big uptake and every new promotion brought tons of customers into the store. Chipotle consequently reported big growth quarter after big growth quarter, the sum of which powered CMG stock from $400 in late 2018, to $850 by late 2019.

But, then the growth narrative hit a snag. Specifically, in its third-quarter earnings report, Chipotle said it plans to slow the pace at which it opens new stores this year. Investors freaked out. CMG stock tumbled.

This panic is an overreaction. Chipotle is still on track to add about 150 new units per year for the next several years. The 2019 slowdown is just temporary. Meanwhile, comparable-store sales, traffic and margin trends all remain positive, and management continues to do everything right to keep those trends positive, including menu innovations and digital business expansion.

Broadly, then, the growth narrative here remains favorable. Rebounding consumer confidence should only add more firepower to the growth narrative. As it does, CMG stock should continue to bounce back from its post-earnings selloff.

Square (SQ)

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Percent off 52-Week Highs: 21%

One of the more hated services stocks on this list is payments processor Square (NYSE:SQ). Year-to-date, SQ stock is down 17%, and shares presently trade about 21% off their one-year highs.

Why the persistent weakness in SQ stock? Slowing payment volume and revenue growth rates have investors concerned that as Square grows, it’s running into more competition, and that this competition will ultimately kill Square’s big growth narrative.

But, Square just reported third-quarter numbers and growth didn’t slow sequentially. Specifically, gross payment volume growth in Q3 was 25%, the same rate reported for Q2, with the implication being that Square may be finally figuring out how to fight off competitive headwinds by adding more services into its payment ecosystem.

In this light, sequential stabilization in the company’s volume growth rate in Q3 added credibility to this idea that recent weakness in SQ stock is overstated, because competition concerns are overstated. As that idea gains momentum, SQ stock should rebound, especially considering that the broader services economy is improving.

Pinterest (PINS)

Pinterest Stock Is Richly Valued and Running out of Room to Run

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Percent off 52-Week Highs: 47%

The newest services stock on this list, Pinterest (NYSE:PINS) is also: 1) the services stock which has been killed the most on the list, and 2) the one with arguably the biggest rebound potential.

At present, PINS stock trades nearly 50% off its all-time highs. The weakness can be attributed mostly to a disappointing third-quarter earnings report wherein revenue growth decelerated meaningfully. The market’s takeaway? Pinterest is having a tough time monetizing in a crowded digital ad landscape, so revenue growth rates will be weaker than expected going forward. Investors consequently sold in bunches. PINS stock plummeted.

But, Pinterest’s management is doing everything right to make sure this growth slowdown is temporary. Specifically, the company is making the platform more “shoppable” by integrating with Shopify (NYSE:SHOP) in an attempt to bring more merchant products and ad dollars into the ecosystem. It is also making a big push on the small business front, since Pinterest is arguably one of the best platforms for connecting small businesses to relevant customers.

In the big picture, then, the third-quarter revenue slowdown was ephemeral. Growth rates will pick back up over the next few quarters. As they do, PINS stock will rebound.

McDonald’s (MCD)

Stocks to Buy: McDonald’s (MCD)

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Percent off 52-Week Highs: 12%

Much like Chipotle, fast-casual giant McDonald’s (NYSE:MCD) could do no wrong for most of 2019. Every move the company made was the right move, and powered big gains in traffic, comparable-store sales, revenues, profits and the stock price.

Things have changed over the past two months. McDonald’s reported third-quarter numbers in October that included a rare earnings miss and a noticeable slowdown in global and domestic comparable sales growth. After that, the company fired its CEO over a consensual relationship with an employee. The company’s chief people officer left shortly thereafter, amid escalating murmurs about a sexually toxic culture at McDonald’s.

In other words, everything has gone wrong for McDonald’s over the past few months. That’s why MCD stock presently trades 12% off its one-year highs.

MCD stock should rebound from here for a few reasons. First, the broad consumer and services economy backdrops are improving. Second, McDonald’s numbers in the third quarter were still pretty good, and showed that this company continues to gain market share. Third, there are plenty of catalysts on the horizon (including new menu innovations and technology integrations) which should keep the numbers good here for a lot longer. Fourth, the C-Suite noise which has weighed on investor sentiment will eventually fade.

Big picture, then, MCD stock looks poised for a rebound here.

As of this writing, Luke Lango was long TTD, CHGG, SQ, PINS, SHOP and MCD. 

Article printed from InvestorPlace Media, https://investorplace.com/2019/11/6-best-consumer-services-stocks-to-buy/.

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