Consumer discretionary stocks, also known as cyclical stocks, are those stocks which represent companies producing non-essential goods and services. Consumers tend to reduce discretionary spending in tough economic times such as those we currently face. Consumers exercise more discretion during tough times, and less during times of plenty. This consumer behavior and discretionary spending strongly correlates to movement in this stock sector. So, investors are curious to know which discretionary stocks are worth buying now.
A general method by which to judge a given stock sector’s performance is to find its representative exchange-traded fund. The Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY) is the representative ETF for this sector. Investors can then compare that ETF against a broad market indicator, such as the S&P 500’s performance. This provides a general outlook for consumer discretionary stocks.
Consumer Discretionary Stock Performance VS. S&P 500
S&P 500 Past year’s performance: From $2,932.05 @ Aug. 2, 2019 to $3,271.12 @ July 31, 2020 = 11.56% increase.
S&P 500 Pandemic bottom performance: From $2,237 @ March 23, 2020 to $3,271.12 @ July 31, 2020 = 46.23% increase.
Consumer Discretionary Select Sector SPDR ETF
Past year’s performance: From $118.10 @ Aug 2, 2019 to $137 @July 31, 2020 = 16% increase.
Pandemic bottom performance: From $87.53 @March 23, 2020 to $137 @July 31, 2020 = 56.52% increase.
Thus, investors can see that average cyclical stocks have been outpacing general stocks both over the past year, and also since the pandemic’s trough. Investors may note that this seems at odds with the notion that discretionary stocks should trade lower in this economic environment. Nevertheless, the numbers do not lie.
Investors may use this logic in choosing to add cyclicals to their respective portfolios. Bearing that in mind, here are seven consumer discretionary stocks worth buying now:
- McDonald’s (NYSE:MCD)
- Dunkin Brands Group (NASDAQ:DNKN)
- Ross Stores (NASDAQ:ROST)
- TJX Companies (NYSE:TJX)
- Tractor Supply (NASDAQ:TSCO)
- Wingstop (NASDAQ:WING)
- Domino’s (NYSE:DPZ)
Here’s a look at what makes each worthy of consideration.
Consumer Discretionary Stocks: McDonald’s (MCD)
Although it might be one of the world’s most easily recognizable fast food companies, McDonald’s has suffered during the pandemic. MCD stock recently dipped a few percentage points on continued pandemic worries. However, it’s not all doom and gloom.
To-go sales will continue to buoy the company while this strange time rolls on. After that, expect MCD stock to rise again.
The analysts who cover McDonald’s for the Wall Street Journal are quite strongly in favor of buying shares in the company. Specifically, 23 analysts rate it a buy and 8 rate it as a hold. With their average price target of $215, there is plenty of room for growth from its current price of $199. Adding to the allure of MCD stock is the company’s dividend (a yield of 2.5%), which should further entice investors.
Dunkin Brands Group (DNKN)
Dunkin Brands’ stock sits in the high $60s, but there is reason to believe that it could approach mid-to-high $70s. The company’s latest results were solid considering the impact of the novel coronavirus on the fast food industry more broadly. Dunkin met EPS consensus estimates, while beating revenue estimates.
As the economy opens up, more people will be driving again and on the hunt for a quick bite to eat or a cup of coffee for energy on their commute. The simple fact is once we start to define the “new normal” coffee and donut consumption should rise again. JPMorgan analysts John Ivankoe moved shares to overweight with a $76 target price on the news.
Ross Stores (ROST)
People want to shop, and people want bargains. Ross is a discount retailer that satisfies both of those desires. ROST stock dipped below $60 a share in the depths of the downturn. Shares quickly rose back up to the $80s, and have plateaued there for 4 months.
ROST stock has been steadily climbing upward for the past 3 years. Investors who view its price chart will see that it has grown very predictably. That trend only stopped due to the pandemic. Investors who purchase shares in the $80 range shouldn’t be surprised to see it eclipse $100 following a reopening.
Furthermore, shares traded around $120 before the pandemic hit. There’s a lot of rebound built into this stock, which makes it one of the key consumer discretionary stocks to watch now.
TJX Companies (TJX)
The TJX Companies are most noted for TJMaxx and Marshalls stores. It operates within the same niche as Ross Stores mentioned above. As such, TJX stock should rise for many of the same reasons as ROST.
In fact, if you look at the performance of TJX stock more closely, you’ll see that it has followed a very similar upward trend over the past 3 years as ROST stock. Based on average analyst expectations, TJX shares should rise about 20% within 12-18 months. For that reason and many of the reasons mentioned above for Ross Stores, TJX should prove to be one of the more appealing consumer discretionary stocks out there as we start to head into the new normal.
Tractor Supply (TSCO)
It might seem strange, but the Tractor Supply Company is a firm that has managed to grow during the pandemic. And when you think about it a little longer, it should actually not be too much of a surprise.
After all, more people are spending time at home rather than going out. This dynamic is helpful for retailers like Tractor Supply, which provide the tools necessary for many indoor and outdoor home projects. More specifically, TSCO stock should benefit from its Q2 35% increase in net sales YOY, and triple digit e-commerce growth.
Shares were flat for about 18 months prior to the pandemic, but have just about doubled following the trough. Investors should look for an opportunity to buy a dip here. Some owners will look to book profits on the upward momentum and strong earnings report. But, investors have an opportunity there because the DIY trend isn’t slowing soon.
Regardless of the pandemic, WING stock showed strong YOY performance in Q2. Sales were up 37%, and the chain opened 23 locations during the quarter. Management expects that the company will open between 120 and 130 locations for the entire year.
This company has undergone steady growth over the past few years. Analysts were expecting 29 cents-per-share earnings and the company delivered 39 cents-per-share earnings. Dividend investors will be pleased to know the company will be paying a dividend of 14 cents in September. All of these factors combine to make Wingstop one of the more appealing fast casual food plays on the market today.
DPZ stock is another food-based discretionary stock that’s worth buying. Markets are keen to note Chipotle’s (NYSE:CMG) performance during the pandemic. Both companies have done well. However, Chipotle’s price-to-earnings ratio of 130x compared to Domino’s 34x makes the latter a better deal. Thus, I can’t recommend Chipotle because frankly, paying $1,100 for a burrito stock is kinda suspect.
On the other hand, Domino’s has marched upward over the past few years just as many others on this list have. Analysts have had DPZ stock pegged as overweight for the past 3 months with price targets even eclipsing $500.
As consumers switch away from staple foods and dedicate more money to their discretionary food budgets, DPZ stock increasingly looks more like a safe bet.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing. As of this writing, Alex Sirois did not own shares of any of the aforementioned securities.