For journalists across the globe, covering the novel coronavirus pandemic has to be one of the most frustrating experiences of their careers. While you don’t want to paint an overly pessimistic view of the crisis given that people’s livelihoods depend on robust economic activities, you don’t want to be dismissive of the threats either. And that brings up the contested narrative of consumer discretionary stocks.
I’ll be the first to admit that I haven’t always called the ebb and flow of this pandemic — and its resultant aftershocks — correctly. Honestly, with more plot twists than an M. Night Shyamalan film, the public health threat has put even the most confident analysts in an uneasy state. Thus, betting on consumer discretionary stocks, a sector that requires broader societal support, is a tough proposition.
As you know, the delta variant of the SARS-CoV-2 virus has been a stubborn and unwanted house guest. A recent report from the New York Times suggested that the U.S. “may take an even bumpier path” relative to how other nations handled the delta surge. If those bumps entail a return to tighter restrictions, let alone lockdowns, then the idea of consumer discretionary stocks seems fraught with risk.
At the same time, there are some data points that suggest the delta variant already peaked. According to another article from the NYT, Covid-19 has a mysterious two-month cycle where infections surge then quickly fade away. If that pattern were to hold — though, there are no guarantees here — “caseloads may even soon decline.” If so, that’s a big plus for consumer discretionary stocks.
Overall, about the only thing I can tell you is that you’ve got to determine for yourself if you believe the recovery narrative. Should that answer be in the positive direction, these consumer discretionary stocks just might do the trick for you.
Disney (NYSE:DIS) Electronic Arts (NASDAQ:EA) Best Buy (NYSE:BBY) CarMax (NYSE:KMX) Overstock (NASDAQ:OSTK) Ulta Beauty (NASDAQ:ULTA) Big 5 Sporting Goods (NASDAQ:BGFV)
I’ve said this before and while I’m sick of mentioning it, it’s worth repeating as many times as necessary. We’re in uncharted territory so it pays to be extra cautious and vigilant with your investing strategies, whether that be toward consumer discretionary stocks or any other sector. Therefore, you should consider slowly building your position while keeping the powder keg dry.
Consumer Discretionary Stocks to Buy: Disney (DIS)
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On the surface, the novel coronavirus was exactly the fundamental backdrop that Disney didn’t need. Although the company has been exploring other revenue channels beyond its theme parks and resorts, that sector is really the bread and butter for the Magic Kingdom. With Covid-19 sending billions across the globe into lockdown, it seemed like the perfect storm.
In many ways, the virus is still exactly that. For instance, a recent report came out that Disney World attendance plummeted 80% compared to prior years, even as its home market Florida started reporting declining Covid-19 infections. From a cursory perspective, you’d expect DIS to be one of the struggling units among consumer discretionary stocks. However, you’d be wrong.
While its year-to-date (YTD) performance of 2.1% is absolutely nothing to write home about, over the trailing-year period, DIS stock has gained a very respectable 40%. Moving forward, it’s hard not to see the company start to make up significant ground.
Let’s face it — the Disney experience is part of our American heritage. And even with this pandemic, that has to count for something.
Electronic Arts (EA)
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When it comes to the video game sector, you can almost throw any random name out there and they could well be among the consumer discretionary stocks to buy. Of course I’m being facetious but in some respects, I’m not.
As a story from The Verge pointed out, “More than half of Americans turned to video games during lockdown.” And if that title wasn’t enough to grab your attention, consider the article’s subhead: this is a “habit that’s here to stay.” So if you’re a stakeholder of Electronic Arts, I’m sure you couldn’t be more pleased.
Unlike some of the other publicly traded companies, Electronic Arts has been struggling to get past its pre-Covid highs. Over the past 12 months, for instance, EA is up just 11%, which is rather poor compared to other consumer discretionary stocks.
Still, if you have a forward-looking optimism, the fundamentals seem to be aligning positively for the gaming developer. Primarily, the return of professional sports leagues should help organically boost demand for the company’s EA Sports lineup. As well, the rise of esports tournaments have only bolstered the Electronic Arts brand.
Consumer Discretionary Stocks to Buy: Best Buy (BBY)
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In an age where e-commerce supposedly dominates everything, Best Buy might appear an anachronism. It wasn’t too long ago that business observers derisively called Best Buy a showroom floor for Amazon (NASDAQ:AMZN); in other words, find what you’re looking for on Amazon, play around with it at Best Buy, then go make the purchase back at Amazon.com.
Thankfully for BBY stock shareholders, management wised up to the circumstance, forcing what is one of the most remarkable turnarounds in modern business history. Gone were the hardly profitable ventures and in was the comprehensive shopping experience that you couldn’t get browsing the internet at home.
Obviously, the coronavirus pandemic threw a temporary monkey wrench at this years-long directive. However, I don’t think it’s any coincidence that BBY is among the consumer discretionary stocks that are trading near their all-time highs — and possibly poised to set new records.
Mainly, ample scientific research shows that humans are “inherently social.” Even if you didn’t believe the scientific evidence, you can look at the economic data points. While e-commerce has dominated the lockdown phase, as restrictions ease, the magnitude of online purchases has substantially declined since then.
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One of the consumer discretionary stocks that I regret analyzing only because the underlying sector has been so difficult to predict, CarMax nevertheless could be one of the best-performing names over the coming year.
I know, it goes against presumably everyone’s intuition. It also contradicts some of the talking points I forwarded prior. But at the very least, I believe investors would be best served if they prepare themselves for rising used car prices, even into 2022, perhaps even up till 2023.
For one thing, you have the semiconductor shortage. The thing about these optimistic projections you hear about the being past the peak of the crisis is that it’s going to probably take a year for the production backlog to translate to robust inventory at your local dealership.
Second, major automakers like Toyota (NYSE:TM) have recently announced massive global production cuts. That’s going to lead to constrained supply down the line and you’re already seeing it happen. For the quarter ended May 31, 2021, CarMax reported 43.15 days inventory, which is the lowest quarterly metric of its kind since at least the three months ended Aug. 31, 2021.
Consumer Discretionary Stocks to Buy: Overstock (OSTK)
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Although the narrative behind longer-than-expected bullishness in used car prices is difficult to swallow at first, a review of the facts makes this market’s dynamics easier to understand. As mentioned above, the combination of reduced supply of core components, a supply-chain backlog and ample demand could see elevated valuations for the next one-year period.
But the housing boom? I must admit that I’m still confused by it. Yes, I get the inventory shortage argument and the low-interest rate incentive. But keep in mind that prior to the global health crisis, financial analysts were pouring over the myriad reasons why millennials were falling behind prior generations in terms of homeownership rates.
Now seemingly everyone’s buying a home which begs the question: where the heck was this money all along? Were millennials sandbagging their financial status to stick it to the boomers?
Whatever the reason, Overstock could be one of the hidden gems among consumer discretionary stocks since it doesn’t attract the attention that other hot names do. Nevertheless, with demand still through the roof for housing solutions, that should translate well for retailers specializing in discounted household goods.
Ulta Beauty (ULTA)
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In keeping with the theme that we’re social creatures, Aristotle once wrote “Man is by nature a social animal.” But the matter goes well deeper than merely the desire to have associates around us. According to Michael Platt, Ph.D., a biological anthropologist from the University of Pennsylvania’s Perelman School of Medicine, “Human beings are wired to connect — and we have the most complex and interesting social behavior out of all animals.”
Enough so that this desire for connectivity trumps fear of the coronavirus? Perhaps so if you look at the performance of Ulta Beauty. On a YTD basis, ULTA stock shares are up more than 31% while on a trailing-year basis, the equity unit has gained slightly under 60%. These are very solid figures for larger-capitalization consumer discretionary stocks.
Indeed, Ulta should thank Mother Nature — or whoever/whatever dishes out our personalities — because at the onset of the pandemic, ULTA stock suffered badly, basically dropping half its market value. But the narrative quickly turned positive as contrarians reasoned that the crisis will eventually fade, making ULTA a great value.
While ULTA isn’t exactly as cheap as it was at its current price, it may still outperform due to our desire to look good, feel good and connect with others.
Consumer Discretionary Stocks to Buy: Big 5 Sporting Goods (BGFV)
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Saving the most controversial name for last on this list of consumer discretionary stocks, Big 5 Sporting Goods on the surface doesn’t seem so terrible. And it’s really not. The company specializes in products serving its namesake activities, which is primary camping, hiking, canoeing — you know, outdoors stuff.
However, “outdoors” can be code word for guns. That said, the uncertainties of the social climate along with political pressure from activist groups put the Second Amendment on arguably precarious ground. And while Big 5 is not inherently the place to go for firearms — in part, because it doesn’t sell handguns and centerfire-caliber AR15 rifles — it still carries a wide range of shotguns.
Therefore, consumers can protect their home and their rights, along with buying the latest camping gear, all in one place. What more could you ask for?
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.’