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Top 5 Consumer Discretionary Stocks to Enhance Your Portfolio

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The consumer discretionary sector suffered the most in terrible 2022. The inflation rate was at a 40-year high. In order to combat mounting inflation, the Fed hiked the benchmark interest rate to its highest level in 15 years and its strict monetary tightening raised the risk-free market interest rate to a two-decade high. A higher interest rate is detrimental to growth sectors like consumer discretionary.

However, as we have entered 2023, consumer discretionary has shown an initial sign of revival. Month to date, of the 11 broad sectors of the market’s benchmark S&P 500 Index, the Consumer Discretionary Select Sector SPDR (XLY) has gained 9.3%, second only to the Communication Services Select Sector SPDR (XLC) that has rallied 12.6%.

At this stage, investment in consumer discretionary stocks with a favorable Zacks Rank should become fruitful. Five such stocks are - Deckers Outdoor Corp. (DECK - Free Report) , Activision Blizzard Inc. (ATVI - Free Report) , Live Nation Entertainment Inc. (LYV - Free Report) , Ralph Lauren Corp. (RL - Free Report) and NIKE Inc. (NKE - Free Report) .      

Consumer Discretionary Sector to Revive in 2023

The consumer discretionary sector is set to revive its fortune this year. Here are the reasons:

(1) Peak inflation seems behind us. Less-than-expected inflation rates in October, November and December with respect to several measures have clearly indicated this. The University of Michigan Surveys of Consumers released on Jan 13 showed that the one-year inflation outlook slipped to a preliminary reading of 4.0% this month from 4.4% in December, the lowest reading since April 2021.

(2) The Fed raised  the benchmark interest rate by 4.25% in 2022 to the range of 4.25-4.5%. Market is currently expecting the central  bank to increase the interest rate by maximum 75 basis points in 2023. Some financial analysts are expecting the first rate cut to come in the last quarter of 2023 or in early 2024.

(3) Headwinds of the pandemic are also behind us. China is gradually reopening since the beginning of this year after strict lockdowns last year. This will help revive the completely devastated global-supply chain system. Global trade will also gain momentum.

(4) The U.S. labor market remains resilient. The initial results of the fourth-quarter 2022 earnings were not as disappointing as expected. Therefore, the Fed may reach its goal of a soft landing of the economy.

Our Top Picks

We have narrowed our search to five consumer discretionary stocks with strong potential for 2023. These stocks have seen positive earnings 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 (Strong Buy) Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.

Zacks Investment Research
Image Source: Zacks Investment Research

Deckers Outdoor is a leading designer, producer and brand manager of innovative, niche footwear and accessories developed for outdoor sports, and other lifestyle-related activities.

DECK’s focus on expanding brand assortments, introducing more innovative lines of products, targeting consumers digitally and optimizing omni-channel distribution have been contributing to its performance. DECK is targeting profitable and underpenetrated markets, and remains focused on product innovations, store expansion and enhancing e-commerce capabilities.

Deckers Outdoor has an expected earnings growth rate of 11.4% for the current year (ending March 2023). The Zacks Consensus Estimate for current-year earnings improved 0.1% over the last 60 days.

Activision Blizzard develops and distributes content and services on video game consoles, personal computers and mobile devices. ATVI’s top line is expected to benefit from an expanding user base of Call of Duty (COD), Hearthstone, World of Warcraft (WoW) and Candy Crush franchises. This is expected to boost in-games spending. Moreover, the growing popularity of Diablo II: Resurrected is expected to boost top-line growth. ATVI’s strong liquidity position and free cash flow generation ability are noteworthy.

Activision Blizzard has an expected earnings growth rate of 28.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.3% over the last 30 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 last 30 days.

Ralph Lauren designs, markets and distributes lifestyle products in North America, Europe, Asia, and internationally. RL is progressing well with its “Next Great Chapter” plan that was announced in June 2018. This strategic growth plan focuses on delivering sustainable long-term growth and value creation.

RL has gained from brand strength, solid demand, and expansion across all channels and regions. Favorable product mix and robust full-priced selling trends have been aiding AURs. Also, a solid online show bodes well.

Ralph Lauren has an expected earnings growth rate of 13.4% for next- year (ending March 2024). The Zacks Consensus Estimate for next-year earnings improved 1.3% over the last 30 days.

NIKE boasts a robust surprise trend, which continued in first-quarter fiscal 2023. NKE gained from brand strength, robust consumer demand and an innovative product pipeline. Its Consumer Direct Acceleration strategy, along with robust performance in its digital and DTC businesses also aided results.

The NIKE Direct business benefited from double-digit currency-neutral growth in North America, EMEA and APLA, offset by weakness in Greater China. NKE has been benefiting from its efficient digital ecosystem, which comprises its online site as well as commercial and activity apps.

NIKE has an expected earnings growth rate of 25.4% for next year (ending May 2024). The Zacks Consensus Estimate for next-year earnings improved 26.7% over the last 60 days.

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