Consumer discretionary has been one of the best-performing sectors this year, with the Consumer Discretionary Select Sector SPDR Fund (XLY) returning 17% in the first quarter, outpacing the Russell 1000 Index’s 7% return during the same period. This is in stark contrast to last year when XLY dropped 36% as investors evaluated the demand outlook for non-essential items in the face of a slowing economy.
Inflation remains a concern for investors this year, but as last year’s rate hikes work their way through the economy, combined with recent stress in the financial system, investors have begun to look towards the horizon and have bought up high-performing discretionary names in anticipation of a slowing Fed.
Below are some of the best names in this sector, classified by value, growth, and momentum. All data are as of March 31.
Best Value Consumer Discretionary Stocks
These are the consumer discretionary stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows that you’re paying less for each dollar of profit generated. But they also could turn out to be a classic case of a value trap.
| Best Value Consumer Discretionary Stocks | |||
|---|---|---|---|
| Price ($) | Market Capitalization (Market Cap) ($B) | 12-Month Trailing P/E Ratio | |
| Light & Wonder Inc (LNW) | 58.58 | 5.3 | 1.5 |
| Beazer Homes USA Inc (BZH) | 15.21 | 0.5 | 2.2 |
| OneWater Marine Inc (ONEW) | 26.85 | 0.4 | 3.2 |
Source: YCharts
- Light & Wonder Inc.: Formerly known as Scientific Games Corporation, Light & Wonder designs gaming content for casinos and related businesses. Light & Wonder has underperformed the XLY year to date, and its low P/E multiple is a reflection of its heightened risks. The company recently paid off $4.8 billion in debt, but ended 2022 with 3.3 times net debt to EBITDA, while cash flows from operations fell over $1 billion from $685 million in 2021.
- Beazer Homes USA Inc.: Beazer designs and builds residential homes, primarily in the southern U.S. After falling 60% from its 2021 highs, Beazer has joined other homebuilders in a relief rally, rising more than 40% since last Fall.
- OneWater Marine Inc.: OneWater Marine is one of the largest and fastest-growing marine retailers in the United States. The stock is down 20% in the past year, hurt by macroeconomic uncertainty and the return on seasonality in new boat sales. However, the company’s expansion of its services and parts business paid off in the last quarter of 2022, with sales up 86% year over year.
Fastest Growing Consumer Discretionary Stocks
These are the top consumer discretionary stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly year-over-year (YOY) percentage revenue growth and most recent quarterly YOY earnings-per-share (EPS) growth. Both sales and earnings are critical factors in the success of a company. Therefore, ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one figure or the other unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of more than 1,000% were excluded as outliers.
| Fastest Growing Consumer Discretionary Stocks | ||||
|---|---|---|---|---|
| Price ($) | Market Cap ($B) | EPS Growth (%) | Revenue Growth (%) | |
| BYD Co Ltd (BYDDY) | 58.43 | 85 | 975 | 98 |
| Airbnb Inc (ABNB) | 122.28 | 77.2 | 500 | 24 |
| Planet Fitness Inc (PLNT) | 76.71 | 65.4 | 471 | 53 |
Source: YCharts
- BYD Co Ltd.: BYD is a manufacturer of full and hybrid electric vehicles and bicycles, based in Shenzhen, China. Owing to its scale and China’s reopening, BYD has been able to ramp up sales faster than its competitors with operating revenues for the first six months of 2022 increasing 60% over the prior year.
- Airbnb Inc.: Airbnb operates a platform that facilitates short-term rentals and stays. With travel demand surging in 2022, Airbnb recorded year-over-year gross bookings value and net sales growth of 35% and 40%, respectively. Furthermore, Airbnb recorded its first-ever profitable year with $1.9 billion in net income, compared to a net loss of $352 million in 2021.
- Planet Fitness Inc.: Planet Fitness is an operator and franchiser of fitness centers across North America, Australia, the Dominican Republic, and Panama. Like Airbnb, Planet Fitness has capitalized on the reopening boom, with same store sales increasing 11% for fiscal 2022, translating into 60% revenue growth and 71% EBITDA growth during the same period. The company also ended the year with 158 new locations and 1.8 million new members.
Consumer Discretionary Stocks With the Most Momentum
These are the consumer discretionary stocks that had the highest total return over the past 12
months.
| Consumer Discretionary Stocks with the Most Momentum | |||
|---|---|---|---|
| Price ($) | Market Cap ($B) | 12-Month Trailing Total Return (%) | |
| Luckin Coffee Inc (LKNCY) |
27.7 | 7.3 | 178 |
| Modine Manufacturing Co (MOD) |
22.48 | 1.2 | 144 |
| MINISO Group Holding Ltd (MNSO) |
17.42 | 5.5 | 121 |
| Russell 1000 Index | N/A | N/A | -11 |
| Consumer Discretionary Select Sector SPDR ETF (XLY) | N/A | N/A | -19 |
Source: YCharts
- Luckin Coffee Inc.: Luckin is a Chinese holding company that operates a coffee retail business. The company operates primarily through mobile apps and pick-up stores, selling fresh-brewed drinks, juices, and light meals. Luckin opened 2,100 locations in 2022, generating $1.9 billion in revenue (up 67% from 2021) and servicing 21.6 million average monthly transactions. Luckin’s growth has helped its stock price recover after plummeting from $50 in January 2020 to just over $1 in May 2020 as the company dealt with COVID-19 lockdowns and an accounting scandal for which it agreed to pay the SEC $180 million to resolve in December 2020.
- Modine Manufacturing Co.: Modine makes heat exchanges and related equipment for automotive aftermarket suppliers and building companies. Modine is in the middle of a turnaround, as it transitions into a higher margin, higher return business with a focus on growing markets. So far, it appears the strategy is working with net sales increasing 12% year over year in the last three months of 2022. EBITDA, gross profit, and cash flows also improved over the period.
- MINISO Group Holding: MINISO is a global household goods store, founded in Guangzhou, China. It specializes in low-cost products targeted at a younger demographic. MINISO is currently expanding its footprint worldwide, adding 238 international stores and 56 Chinese stores in 2022 to end the year with a total of 5,440 locations. While the Chinese market experienced a 27% drop in revenues last year due to COVID restrictions, revenue at overseas MINISO stores increased more than 38% year over year.
Advantages of Consumer Discretionary Stocks
Growing Economy: Consumer discretionary stocks capitalize on a healthy economy. Consumers with higher discretionary income are more likely to purchase “wants,” such as new designer clothes, the latest electronic gadgets, or a long-awaited family vacation. Generally, the group performs well when consumer confidence is high, with shoppers feeling secure about their employment situation and financial position. Investors can track consumer sentiment by following the Consumer Confidence Index (CCI)—a survey administered by The Conference Board that measures how optimistic or pessimistic consumers are regarding their expected financial situation.
Brand: Many consumer discretionary stocks benefit from strong brand recognition, helping to drive revenue and create market share. Moreover, companies that build brand loyalty can enter new product areas, or even new industries, taking their existing customers with them. For example, Amazon.com, Inc. (AMZN) started as an online marketplace for books, but through increased brand awareness, it grew into an e-commerce giant and is now a global conglomerate involved in everything from digital streaming to logistics.
Risks of Consumer Discretionary Stocks
Slowing Economy: Just as consumer discretionary stocks perform well during periods of economic expansion, they struggle in downturns and recessions when consumers rein in their spending on discretionary products and services.
Supply Chain Disruptions: Consumer discretionary companies face challenges from snarls in supply chains. For instance, during the COVID-19 pandemic, many companies in the sector faced months of disruptions from border closures, shipping delays, and cargo backlogs. These issues can increase costs. Companies can try to pass those expenses on to consumers, but there’s no guarantee will accept price increases.
Inflation: Rising prices can deter potential customers from purchasing discretionary items, particularly if consumer confidence starts to fall. Many economists have forecast a recession for the U.S. economy in 2023 after inflation hit a 40-year high in June 2022. Additionally, price hikes in other areas of the economy can have a contagion effect on consumer discretionary stocks. For example, a rise in airline tickets due to higher fuel costs can weaken demand for hotels.
