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Investing in Top Consumer Discretionary Stocks

Updated: Dec. 20, 2021, 10:50 a.m.

When it comes to shopping, there are things that you need, and things that are mostly just nice to have. The consumer discretionary sector is in that second category -- the goods and services that people spend money on when they have a little extra cash available.

Unlike consumer staples companies -- which make necessities -- consumer discretionary stocks tend to do well when the economy is strong, and poorly when times are tough. Below are some top consumer discretionary stocks to consider and a close look at this part of the stock market.

Did you know?

The COVID-19 pandemic has impacted the consumer discretionary sector differently than it has the consumer staples sector, which sells necessities.

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Top consumer discretionary stocks

Several consumer discretionary companies stand out as being among the best in their industries.

Consumer Discretionary Stock Description of Business
Nike (NYSE:NKE) Athletic apparel and footwear
Starbucks (NASDAQ:SBUX) Coffeehouse chain
McDonald's (NYSE:MCD) Restaurant chain
TJX Companies (NYSE:TJX) Off-price retailer
Disney (NYSE:DIS) Family entertainment

1. Nike

Nike has established a dominant position in athletic footwear and apparel, with more than half a century of innovation in making sports equipment accessible to a broad consumer audience. The strength of Nike's business model stems from its use of celebrity endorsements, tying the success of high-profile athletes to the company's products.

Long after Michael Jordan left the professional basketball court, Air Jordan shoes remain a mainstay of Nike's business. Nike’s market share of athletic footwear, recently estimated at between 25% and 30%, puts it well ahead of international competitors Adidas (OTC:ADDYY) and ASICS (OTC:ASCCF). And with the global sportswear company working to play a bigger role in fast-growing areas such as China, the sky's the limit for Nike's future growth.

Though COVID-19 has impacted Nike’s business, it’s also accelerated the company’s shift to digital and direct channels, a key part of the company's strategy. Nike has built a strong digital ecosystem around apps like SNKRS and the Nike Training Club, which has buffered much of the impact of the crisis. Even as revenue growth has been sluggish during the pandemic, Nike has delivered solid profits.

2. Starbucks

The coffee company has a role in how much of the world's population starts its day, with its ubiquitous coffeehouses sporting lines out the door most mornings. By introducing the European café concept to the American masses, Starbucks taps into consumers’ urges to treat themselves to small luxuries, and its premium beverages now have a loyal following the world over.

You can see the company’s success in its comparable-store sales, which have a history of growing steadily. Though those sales numbers fell sharply during the pandemic, Starbucks is rebounding quickly. The company is expecting comparable-store sales growth of 18% to 23% in its fiscal year 2021.

Starbucks gained market share during the crisis due to the strength of its brand, tech initiatives, and financial flexibility, as rivals like independent cafés have struggled. The company as of December, 2020, has more than 33,000 locations across the globe, and expects to have 55,000 locations by 2030, indicating no shortage of growth opportunities.

3. McDonald's

McDonald's has come a long way from its heyday in the mid-20th century, and the fast-food colossus has worked hard to keep up with the times. Innovations such as digital menus that automatically change throughout the day, automated kiosks for ordering, online and mobile order capabilities, and delivery options are making McDonald's more accessible than ever.

At the same time, the restaurant chain still has an emphasis on value that keeps customers coming back for more, and its drive-thrus have helped it weather the pandemic better than many other restaurant chains. It also owns much of the real estate that its franchised restaurants occupy, allowing it to collect rent while franchisees do the hard work of running restaurants.

Even in the ever-changing restaurant space, McDonald's has found a way to stay not only relevant, but hip. Investors also like McDonald's for its consistent dividend payments. It has increased those payments to shareholders each year since the mid-1970s, making the company a Dividend Aristocrat. With a payout ratio of around 70% of earnings, McDonald's comfortably pays its dividend.

4. TJX Companies

Off-price retail giant TJX Companies has found success in apparel and home goods with a business model that’s not easily replicated online. The parent company of TJ Maxx, Marshall’s, and Home Goods obtains discounted brand-name merchandise through close-out sales, manufacturer errors, and order cancellations, and then sells that merchandise at 20% to 60% discounts.

The company's business has generated wide profit margins and solid growth over the years, and the company plans to expand to more than 6,000 stores globally, up from about 4,500 today.

Though TJX took a hit during the pandemic like other discretionary retailers, the company managed to produce a slim profit in 2020. TJX reinstated its dividend with a 13% increase, a further sign of its confidence in its recovery.

5. Walt Disney

Disney, the household name in family entertainment, has been a staple of Americana pop culture for generations. The company’s theme parks and animated movies are popular the world over. Today, the company also owns ABC, ESPN, Pixar, Marvel, Star Wars, a majority stake in Hulu, and a vast array of assets that it acquired from Fox in a 2019 deal.

Disney has a number of competitive strengths, including an unrivaled trove of intellectual property and a flywheel business model that enables successful movies like Frozen to be spun into multiple business lines -- such as theme park rides, toys, consumer products and even live entertainment.

The company was affected on multiple fronts by the pandemic -- its theme parks were shut down or operating at limited capacity, movie theaters went dark, and live sports were even canceled for several months. However, the company has found a winner with its streaming service, Disney+, which was launched in 2019 and now has more than 100 million subscribers. Disney even restructured its entertainment business to make the Disney+ streaming service its centerpiece.

With the economy rapidly reopening, Disney will likely be among the winners in the recovery. Its parks and resorts segment is well positioned to profit from surging year-over-year revenue and could even post record attendance due to pent-up demand.

Understanding consumer discretionary stocks

Consumer discretionary businesses cover several different industries, but all rely on consumers spending money that they don't need to spend. Consumer discretionary companies include the following types of businesses:

  • Manufacturers of cars, trucks, and motorcycles
  • Tire makers and producers of auto parts and equipment
  • Homebuilders
  • Makers of furniture, tools and hardware, appliances, housewares, and other home furnishings
  • Consumer electronics manufacturers
  • Apparel and luxury goods companies
  • Retailers of various kinds, including department stores, home-improvement retailers, electronics retailers, home furnishers, apparel stores, and auto dealers
  • Direct-to-consumer retailers that sell goods by catalog, mail, or via e-commerce
  • Hotel, resort, and casino operators
  • Restaurant companies
  • Cruise operators
  • Providers of consumer services, including education

Consumer discretionary stock prices tend to rise and fall with the overall economy, making them cyclical stocks. Although the COVID-19 pandemic has created unprecedented challenges for many consumer discretionary companies, with the economy reopening, investors have a unique opportunity in the sector.

Focusing on well-known brands and industry leaders in this sector is generally a formula for success, as the top stocks have long been winners for investors. These companies should emerge stronger from the crisis, as they can capture market share from stumbling rivals and have deeper pockets to invest in the recovery.

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