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Top 5 Consumer Discretionary Stocks Despite Recent Weakness

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U.S. stock markets have suffered a setback so far this year after two impressive years of blockbuster performance. In line with the broader market trend, the consumer discretionary sector is also going through a bad patch this year. Stocks within the sector have suffered bloody blow despite the great reopening of the U.S. economy.

Nevertheless, a handful of consumer discretionary stocks with a favorable Zacks Rank are available that should provide strong returns in the near term. Five of them are — Whirlpool Corp. (WHR - Free Report) , Marriott International Inc. (MAR - Free Report) , News Corp. (NWSA - Free Report) , Pool Corp. (POOL - Free Report) and Boyd Gaming Corp.. (BYD - Free Report) .

Consumer Discretionary Sector Tumbles YTD

The consumer discretionary sector comprises businesses that sell goods and services, which are considered non-essential by consumers. These are the products that consumers can avoid without any major consequences to their well-being. In fact, these goods are desirable only if the available income of an individual is sufficient to purchase them.

Structurally, the consumer discretionary sector is growth-oriented. The share price of these companies grow over a long time period. Consequently, higher market interest rate is detrimental to this sector. As the Fed is likely to start a higher interest rate regime from this week, the consumer discretionary sector suffered a lot so far this year.

The Consumer Discretionary Select Sector SPDR (XLY - Free Report) — one of the 11 broad sectors of the market’s benchmark S&P 500 Index — has tumbled 17.1% year to date and is currently the largest decliner of all S&P 500 sectors.

Near-Term Catalysts

The pent-up demand of U.S. consumers remains robust although inflation is at a 40-year high. Personal consumption expenditure surged 2.1% in January, beating the consensus estimate of 1.5%. December’s data was revised downward from a decline of 0.6% reported earlier to a decline of 0.8%.

In 2022, the biggest drivers of the U.S. stock markets should be the nation’s strong economic fundamentals. We expect the U.S. economy to become fully operational as the pandemic is expected to reach its peak this winter. In 2021, U.S. GDP increased 5.7%, marking its best performance since 1984. The momentum is likely to continue as the average estimate of 2022 is currently at 3.5%.

Our Top Picks

We have narrowed our search to five consumer discretionary stocks that have strong growth potential for 2022. These stocks have seen positive estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

Marriott is benefiting from its focus on expansion initiatives, digital innovation and the loyalty program. MAR is gaining from the reopening of the international borders and leniency in travel restrictions.

Marriott is consistently trying to expand its worldwide presence and capitalize on the demand for hotels in the international markets. The U.S. and global economies have reopened to a great extent as new coronavirus cases have dropped considerably. Several countries are gradually removing travel restrictions. MAR will be a major gainer of the economy’s reopening.

Marriott has an expected earnings growth rate of 73% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.5% over the last 30 days.

News Corp. is a media and information services company that creates and distributes content for consumers and businesses worldwide. NWSA witnessed strength primarily across the Digital Real Estate Services, Dow Jones and Book Publishing segments.

A surge in profitability was noticed in the News Media segment due to a revival in the advertising market. Moreover, Foxtel’s total streaming subscribers grew substantially. News Corp. remained optimistic about its acquisitions of the OPIS and Base Chemicals businesses that are likely to enhance Dow Jones’ information services business.

NWSA has an expected earnings growth rate of 10.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 13.8% over the last 30 days.

Pool is the world's largest wholesale distributor of swimming pool supplies, equipment and related products. POOL is benefitting from the solid performance of base business, large market presence and strategic expansions through acquisitions.

Solid demand across heaters, pumps, filters, lighting, automation and pool remodeling also benefitted it. Going forward, POOL remains optimistic on the back of products (such as automation and the connected pool), the continuation of the de-urbanization trends and the strengthening of the southern migration.

POOL has an expected earnings growth rate of 16.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 6.3% over the last 30 days.

Whirlpool has gained from strong customer demand and the execution of its cost-based pricing initiatives, which led to sales growth. The cost-based price increases executed in every region helped WHR to fully offset $1 billion and $500 million of raw material inflation in 2021. Whirlpool provided a robust view for 2022.

WHR is on track with early and decisive actions to protect margins and productivity amid the ongoing supply chain constraints and significant inflationary pressures. Whirlpool has implemented cost takeout actions including curtailing of structural and discretionary costs, capturing raw material deflation opportunity, effectively managing working capital and syncing supply chain and labor levels with demand.

WHR has an expected earnings growth rate of 3.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 11.4% over the last 60 days.

Boyd Gaming operates as a multi-jurisdictional gaming company. BYD is benefitting from initiatives to strengthen current operations and growth through capital investment as well as other strategic measures.

The expansion of online betting offerings along with the FanDuel partnership bodes well for Boyd Gaming. Going forward, BYD is optimistic about the online gaming prospects in Ohio. Boyd Gaming has also been undertaking efforts to expand online betting offerings. One of the notable initiatives by the company has been regarding the legalization of sports gambling.

BYD has an expected earnings growth rate of 2.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 7.8% over the last 60 days.

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