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Top 5 Consumer Discretionary Picks Defying Sector's Bloodbath

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U.S. stock markets are reeling under severe volatility in 2022 with no sign of abatement. Market participants are highly skeptical about soaring global inflationary pressure, a higher interest rate regime across the globe and the prolonged war between Russia and Ukraine.

However, despite the sector’s year-to-date bloodbath, a handful of consumer discretionary stocks have appreciated with double-digit returns year to date. Here are five of them with a favorable Zacks Rank — H&R Block Inc. (HRB - Free Report) , Stride Inc. (LRN - Free Report) , Adtalem Global Education Inc. (ATGE - Free Report) , Nexstar Media Group Inc. (NXST - Free Report) and Mattel Inc. (MAT - Free Report) .

Gloomy Economic Scenario

The last two year’s pandemic has completely devastated the global supply-chain system. Signs of inflationary pressure were visible from May 2021. The Fed initially thought that inflation would be transitory as the supply-chain mechanism would resettle gradually.

However, that did not happen and several measures of inflation are currently at their 40-year highs, which compelled the Fed to shift from an ultra-dovish to an ultra-hawkish policy regime.

A large section of economists and financial experts have warned that a higher interest rate regime will result in stagnant demand without effectively reducing the inflation rate as the problem is supply-centric. Consequently, stagflation may result in a recession in the U.S. economy in the near future.

Russia’s invasion of Ukraine and prolonged geopolitical conflict have significantly raised commodity prices, especially the price of crude oil and natural gas. Food inflation has jumped globally as Russia and Ukraine together are major suppliers of wheat globally.

Moreover, the excessive dependence of U.S. corporates on China for cheap inputs, ranging from consumer products for daily use to high-end technology products, is taking a toll as the latter is under lockdown due to the resurgence of COVID-19.

On Jun 7, the World Bank reduced the global growth rate for 2022 to 2.9% from 4.1% estimated in January. The U.S. GDP growth rate for 2022 was reduced to 2.6% from 3.8% predicted in January.

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. Share prices of these companies grow over a long time period. Consequently, a higher market interest rate is detrimental to this sector.

The yield on the benchmark U.S.10-Year Treasury Note is hovering around 3%. A higher risk-free interest rate means a higher discount rate, which will decrease the net present value of future returns, especially for consumer discretionary stocks.

The central bank terminated the $120 billion per month quantitative easing program in March, and raised the benchmark lending rate by 25 basis points the same month and by 50 basis points in May. It also gave a clear signal that two more rate hikes of 50 basis points are coming in June and July. The systematic shrinking of the $9 trillion balance sheet started on Jun 1.

The Consumer Discretionary Select Sector SPDR (XLY) — one of the 11 broad sectors of the market’s benchmark S&P 500 Index — has tumbled 24.6% year to date and is currently the largest decliner of all S&P 500 sectors. The index itself has dropped 12.7% year to date.

Our Top Picks

We have narrowed our search to five consumer discretionary stocks that have popped with double-digit returns year to date. These stocks have solid potential for the rest of 2022 and have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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

Zacks Investment Research
Image Source: Zacks Investment Research

H&R Block is well poised to gain from its five-year strategy known as Block Horizons. HRB is expected to deliver sustainable revenues, operating profit growth and healthy returns on investments, while maintaining a strong balance sheet and liquidity position in the foreseeable future.

The main drivers of H&R Block’s performance post pandemic will be the digital enablement of business, client addition and retention in both Assisted and DIY, greater usage of AI, along with machine learning for product improvement and expansion in small business.

Zacks Rank #1 H&R Block has an expected earnings growth rate of 8.4% for the next fiscal year (ending June 2023). The Zacks Consensus Estimate for the next fiscal year has improved 13.3% over the last 30 days. The stock price of HRB has soared 54% year to date.

Adtalem Global provides a wide array of educational services across medical and healthcare, financial services and business and law worldwide. Despite the pandemic's adverse impact on organic revenue growth, margins expanded across the business owing to operational efficiency and realization of cost synergies associated with the Walden integration.

ATGE’s post-licensure nursing programs, strategic focus, significant scale and buyout synergies have positioned it well in helping the healthcare industry meet its critical workforce talent needs.

Zacks Rank #1 Adtalem Global has an expected earnings growth rate of 38.5% for the next fiscal year (ending June 2023). The Zacks Consensus Estimate for the next fiscal year has improved 36.6% over the last 60 days. The stock price of ATGE has climbed 19.6% year to date.

Stride is a premier provider of K-12 education for students, schools and districts, including career learning services through middle and high-school curriculum. For adult learners, LRN delivers professional skills training in healthcare and technology, as well as staffing and talent development.

Zacks Rank #2 Stride has an expected earnings growth rate of 6.7% for the next fiscal year (ending June 2023). The Zacks Consensus Estimate for the next fiscal year has improved 5.4% over the last 30 days. The stock price of LRN has jumped 21.4% year to date.

Nexstar Media owns, operates, programs or provides sales and other services to television stations in the states of Illinois, Indiana, Maryland, Missouri, Montana, Texas, Pennsylvania, Louisiana, Arkansas, Alabama and New York. NXST’s television station group includes the affiliates of NBC, CBS, ABC, FOX and UPN.

Zacks Rank #2 Nexstar Media has an expected earnings growth rate of 36.5% for the current year. The Zacks Consensus Estimate for the current year has improved 5.4% over the last 30 days. The stock price of NXST has rallied 16.9% year to date.

Mattel is a children's entertainment company, which designs and produces toys and consumer products worldwide. MAT is benefiting from robust e-commerce growth, a highly-efficient supply chain and strong demand for its products.

This along with initiatives toward capturing the full value of its IP and transforming itself into a high-performing toy company bode well. Going forward, Mattel is focused on strong cost and productivity initiatives to support growth, operate more efficiently and rebuild margins.

Zacks Rank #2 Mattel has an expected earnings growth rate of 13.9% for the current year. The Zacks Consensus Estimate for the current year has improved 2.1% over the last 60 days. The stock price of MAT has surged 13.8% year to date.