Wall Street suffered a bloody blow in the first three quarters of 2022 after witnessing an astonishing bull run in the coronavirus-ridden last two years. The tremors of record-high inflation and its aftershock in the form of an extremely hawkish Fed have shaken investors’ confidence. Concerns regarding slowing economic growth and a possible recession have resulted in severe volatility.
A higher interest rate is detrimental to consumer-centric stocks, especially consumer discretionary stocks. However, robust demand is likely to drive both the top and bottom lines of these companies going forward.
We have selected five consumer discretionary stocks with a favorable Zacks Rank. These are —
Marriott Vacations Worldwide Corp. ( VAC Quick Quote VAC - Free Report) , H&R Block Inc. ( HRB Quick Quote HRB - Free Report) , Live Nation Entertainment Inc. ( LYV Quick Quote LYV - Free Report) , BJ's Wholesale Club Holdings Inc. ( BJ Quick Quote BJ - Free Report) and World Wrestling Entertainment Inc. ( WWE Quick Quote WWE - 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. 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 3.7%. 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 Fed has hiked the benchmark interest rate by 3% year to date to the range of 3.25-3.5%.
Consequently, the Consumer Discretionary Select Sector SPDR (XLY) — one of the 11 broad sectors of the market’s benchmark S&P 500 Index — has plummeted 35.2% year to date and recorded the maximum decline among all S&P 500 sectors. The index itself has dropped 20.5% year to date.
Despite the above-mentioned headwinds, the consumer discretionary sector is likely to gain from the strong demand in the U.S. economy. Personal consumption expenditure – the largest component of the U.S. GDP – grew 0.4% month over month in August. The metric grew 0.1% in August, even after adjusting the inflation rate.
U.S. citizens have received unprecedented support in the form of both fiscal and monetary stimuli in the last-two coronavirus-ridden years. However, Americans were unable to spend more due to pandemic-related lockdowns and other restrictions.
Once the rate of COVID-19 infections was marginalized and state governments repealed restrictions, the U.S. economy witnessed a strong pent-up demand. Investment Bank Wells Fargo estimated that Americans had saved nearly $2.1 trillion in the last two years.
Per Wells Fargo, U.S. citizens still had $1.3 trillion of savings at the end of August 2022 despite rising inflation. The robust demand helped U.S. businesses to a large extent to shift higher input costs and wage rates to the prices of the final products.
Our Top Picks
We have narrowed our search to five consumer discretionary stocks. These stocks have solid potential for the rest of 2022 and have seen positive earnings estimate revisions in the past 60 days. Each of our picks carries a Zacks Rank #1 (Strong 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 in the past three months.
Image Source: Zacks Investment Research Marriott Vacations is a leading global vacation company that offers vacation ownership, exchange, rental, resort and property management services. VAC also has exchange networks and membership programs in a large number of resorts across countries. Marriott Vacations’ business is operated under two major segments: Vacation Ownership and Exchange & Third-Party Management.
Marriott Vacations has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 10.9% over the past 30 days.
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 businesses.
H&R Block has an expected earnings growth rate of 7.7% for the current fiscal year (ending June 2023). The Zacks Consensus Estimate for the current fiscal year has improved 8.3% over the past 60 days.
BJ's Wholesale Club’s ability to steer the tough retail environment validates its strong customer value proposition and business model. BJ’s relentless efforts to boost its membership base, simplify assortments, enhance digital capabilities and accelerate club openings should support sales. We foresee sustained improvement in membership fee income as new club openings ramp up.
Markedly, BJ's Wholesale Club’s acquisition of the perishable supply chain from Burris Logistics puts it in an advantageous position to scale up supply chain capabilities and expand fresh food offerings. A jump of 6% in member count in the second quarter speaks of BJ’s ability to drive traffic. We estimate a 14.3% and 7.1% increase in total revenues in fiscal 2022 and 2023, respectively.
BJ's Wholesale Club has an expected earnings growth rate of 10.5% for the current year (ending January 2023). The Zacks Consensus Estimate for current-year earnings has improved 8.5% over the past 60 days.
World Wrestling Entertainment is an integrated media and entertainment company, engaged in the sports entertainment business in the United States and internationally. WWE gained from the return to a full live event schedule, a stellar consumer products business and monetization of content. The company has raised its full-year OIBDA guidance.
World Wrestling Entertainment has been expanding its reach across platforms such as Peacock and Spotify and establishing new sponsor and product partners. WWE’s diversified distribution approach helps it in attaining solid viewership.
World Wrestling Entertainment has an expected earnings growth rate of 17.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 3.8% over the past 60 days.
Live Nation Entertainment has been benefiting from pent-up demand for live events and robust ticket sales. These, along with increased demand for digital ticketing and contactless transactions, are likely to have contributed to the upside.
LYV remains optimistic about its growth prospects in 2022 and 2023. Emphasis on cost-saving efforts bodes well. For concerts, Live Nation Entertainment said that it has already sold more than 100 million tickets for shows in the second half of 2022 and 2023. LYV is likely to benefit from the OCESA buyout.
Live Nation Entertainment has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the past 60 days.