In this article, we will take a look at 12 of the best consumer discretionary stocks to buy.
Consumer discretionary companies are companies that sell non-essential products and services such as entertainment or premium priced products.
Given consumers don’t have to buy consumer discretionary products or services, many consumer discretionary companies do well when the economy is strong and they don’t do as well when the economy is weak. During times when the economy is strong, consumers generally have more money to spend and many consumers spend more on premium items or services they don’t necessarily need. When the economy isn’t strong, many consumers will spend less on discretionary items.
2022
Given high inflation in 2022, the Federal Reserve has increased interest rates six times this year alone and many analysts expect the central bank to raise rates further.
As a result of the rate increases, the odds of a recession in the United States have increased. Goldman Sachs CEO David Solomon said in October, “There’s a reasonable chance of a recession in the U.S., but it’s not certain.” Meanwhile ratings agency Fitch said, “Fitch expects the U.S. economy to enter genuine recession territory — albeit relatively mild by historical standards — in 2Q23.”
As a result of the uncertainty, many consumer discretionary stocks have declined this year as investors anticipate potentially softer demand if a recession occurs next year. With the decline, many leading consumer discretionary stocks trade for fairly attractive valuations if the economy recovers and inflation normalizes in the long term.
In the near to medium term, however, there could be more downside if economic data doesn’t meet expectations. Given the uncertainty, it could be a good idea for long term investors to own a well diversified portfolio of stocks across many different sectors.
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Methodology
For our 12 Best Consumer Discretionary Stocks to Buy list, we chose 12 leading consumer discretionary stocks that had competitive advantages and strong businesses.
Some companies are both consumer staple and consumer discretionary such as The Procter & Gamble Company (NYSE:PG) given the company’s huge product portfolio which spans multiple categories. For the purposes of this article, we included The Procter & Gamble Company (NYSE:PG) and the other companies that might also fit into other sectors as consumer discretionary stocks.
Using the collective wisdom of hedge funds, we ranked the 12 consumer discretionary stocks based on the number of hedge funds in our database that owned shares of the same stock at the end of Q2 2022.
12 Best Consumer Discretionary Stocks to Buy
12. The Clorox Company (NYSE:CLX)
Number of Hedge Fund Holders: 31
Although The Clorox Company (NYSE:CLX) makes consumer staples such as bleach and disinfectant wipes, many of the company’s products are premium priced, and as a result, some consumers are not buying as much of the company’s products as they once did. For FY23, for example, The Clorox Company (NYSE:CLX) sees sales potentially falling 4% year over year to rising 2% year over year. Shares of the company are also down 17.7% year to date given the headwinds. In the long term, however, The Clorox Company (NYSE:CLX) has quality earnings power given its strong brands.
Alongside Netflix, Inc. (NASDAQ:NFLX), The Walt Disney Company (NYSE:DIS), and Amazon.com, Inc. (NASDAQ:AMZN), The Clorox Company (NYSE:CLX) is a consumer discretionary stock that many hedge funds in our database owned at the end of the second quarter.
11. Darden Restaurants, Inc. (NYSE:DRI)
Number of Hedge Fund Holders: 32
Darden Restaurants, Inc. (NYSE:DRI) is a leading restaurant operator that operates chains such as the Olive Garden and LongHorn Steakhouse. In October, Eric Gonzalez of KeyBance raised his price target on Darden Restaurants, Inc. (NYSE:DRI) to $150 from $136 and kept an ‘Overweight’ rating. Gonzalez thinks Darden Restaurants, Inc. (NYSE:DRI)’s scale, data insights, results orientated culture can help its stock perform well in the long term. Of the 895 hedge funds in our database, 32 were long Darden Restaurants, Inc. (NYSE:DRI) at the end of the second quarter.
10. Chipotle Mexican Grill, Inc. (NYSE:CMG)
Number of Hedge Fund Holders: 39
Chipotle Mexican Grill, Inc. (NYSE:CMG) is a leading burrito chain whose shares are down 17.4% year to date. In October, Joshua Long of Stephens trimmed his price target on Chipotle Mexican Grill, Inc. (NYSE:CMG) to $1,760 from $1,900 but kept an ‘Overweight’ rating after the company’s third quarter report.
Pershing Square Holdings commented on Chipotle Mexican Grill, Inc. (NYSE:CMG) in a Q2 2022 investor letter,
We believe Chipotle is one of the best-positioned consumer companies for the current inflationary world. Given significant inflation in food and labor costs, management has planned a menu price increase of approximately 4% for August following a similarly-sized price increase in March. The company has tremendous pricing power due to the superb quality of its food which is priced at a discount to many competitors with inferior offerings, marketing focused on food quality and freshness rather than cost, and a customer base that over-indexes to higher-income consumers, some of whom are trading down from pricier alternatives.
Chipotle’s economic model remains firmly intact, with restaurant-level margins in excess of 25% in the second quarter, up 0.8% year-over-year, and a consistent level of profitability expected for the current quarter. The company is debt-free and generates nearly all its sales in the U.S., insulating its earnings from the foreign currency headwinds facing many other large consumer companies. …”
9. Yum! Brands, Inc. (NYSE:YUM)
Number of Hedge Fund Holders: 40
Yum! Brands, Inc. (NYSE:YUM) is a leading restaurant operator that either franchises or operates around 53,000 restaurants under various company brands such as KFC, Pizza Hut, Taco Bell and more. On 11/2, Yum! Brands, Inc. (NYSE:YUM) reported Q3 adjusted EPS of $1.09 versus the consensus estimate of $1.14 given the strong U.S. dollar. Yum! Brands, Inc. (NYSE:YUM) sales, however, were above expectations as consumers have not pulled back spending as much as expected.
8. McDonald’s Corporation (NYSE:MCD)
Number of Hedge Fund Holders: 50
McDonald’s Corporation (NYSE:MCD) is a leading restaurant operator and franchisor that could potentially benefit from high inflation if enough consumers choose to go to McDonald’s rather than more expensive restaurants. Although a recession would still be a headwind for McDonald’s Corporation (NYSE:MCD), shares of the stock have rallied 2.9% year to date as investors anticipate the company’s business to remain relatively steady. On 10/28, Christpher Carril of RBC Capital raised his price target on McDonald’s Corporation (NYSE:MCD) to $295 from $275 and kept an ‘Outperform’ rating on shares.
7. Starbucks Corporation (NASDAQ:SBUX)
Number of Hedge Fund Holders: 55
Starbucks Corporation (NASDAQ:SBUX) is a leading coffee chain whose shares have fallen 22.5% year to date given the broader market weakness and recession worries. In terms of the fourth quarter, however, Starbucks Corporation (NASDAQ:SBUX) reported adjusted EPS of $0.81 and revenue of $8.4 billion versus the consensus of $0.72 and $8.31 billion. 55 hedge funds in our database held shares of Starbucks Corporation (NASDAQ:SBUX) at the end of Q2 2022, ranking the company #7 on our list of 12 Best Consumer Discretionary Stocks to Buy.
6. Colgate-Palmolive Company (NYSE:CL)
Number of Hedge Fund Holders: 55
While Colgate-Palmolive Company (NYSE:CL) makes consumer staples products such as toothpaste, the company’s products are still discretionary in that they are often not the lowest price. As a result, Colgate-Palmolive Company (NYSE:CL) has faced some headwinds this year given the high inflation and potential softer economy. For Q3, Colgate-Palmolive Company (NYSE:CL) reported adjusted EPS of $0.74 on sales of $4.46 billion versus the expected earnings of $0.73 on sales of $4.47 billion.
Like Colgate-Palmolive Company (NYSE:CL), Netflix, Inc. (NASDAQ:NFLX), The Walt Disney Company (NYSE:DIS), and Amazon.com, Inc. (NASDAQ:AMZN) are consumer discretionary stocks that many hedge funds in our database owned at the end of Q2 2022.
5. The Procter & Gamble Company (NYSE:PG)
Number of Hedge Fund Holders: 71
Although it makes consumer staples such as laundry detergent, many of The Procter & Gamble Company (NYSE:PG)’s products are premium priced given the company’s position in the market. Given the higher inflation and economic uncertainty in the world, some consumers are buying less of The Procter & Gamble Company (NYSE:PG)’s products. As a result of the macro headwinds, The Procter & Gamble Company (NYSE:PG) sees FY23 EPS towards the low end of the previous guidance range. In the long term, however, The Procter & Gamble Company (NYSE:PG) has high quality earnings power that still make it attractive.
4. NIKE, Inc. (NYSE:NKE)
Number of Hedge Fund Holders: 72
Premium footwear and apparel maker NIKE, Inc. (NYSE:NKE) has fallen 43% year to date as macro headwinds and industry specific challenges have weighed on the company’s earnings results. While the near term is still uncertain, Rick Patel of Raymond James takes the long view and has a $99 price target and an ‘Outperform’ rating given NIKE, Inc. (NYSE:NKE)’s competitive advantages. 72 hedge funds in our database were long NIKE, Inc. (NYSE:NKE) at the end of Q2 2022.
3. Netflix, Inc. (NASDAQ:NFLX)
Number of Hedge Fund Holders: 95
Netflix, Inc. (NASDAQ:NFLX) is a leading online video streamer that also produces entertainment content. If a recession occurs, Netflix, Inc. (NASDAQ:NFLX) could find it harder to grow its subscriber base as customers may choose cheaper alternatives for entertainment. Nevertheless, Netflix, Inc. (NASDAQ:NFLX) has potential if it can exceed the market’s earnings growth estimates for the future. As of Q2 2022, 95 hedge funds we track were long Netflix, Inc. (NASDAQ:NFLX).
2. The Walt Disney Company (NYSE:DIS)
Number of Hedge Fund Holders: 109
The Walt Disney Company (NYSE:DIS) is a leading entertainment conglomerate whose shares are down 36% year to date. On October 26, Brandon Nispel of KeyBanc trimmed his price target to $143 from $154 on The Walt Disney Company (NYSE:DIS) but kept an ‘Overweight’ rating given negative macro trends could be a headwind for the entertainment company’s Media business.
Third Point commented on The Walt Disney Company (NYSE:DIS) in a Q3 2022 investor letter,
“As disclosed in our Q2 letter, we reinitiated a significant position in The Walt Disney Company (NYSE:DIS) when the company retested its Covid lows earlier this year. At the current price, Disney is trading for little more than the stand-alone value of its Parks business and a mere 15x ’24 “street” consensus. The company remains early in its Direct to Consumer (“DTC”) transition with a leading market position, and yet the current stock price ascribes negligible value to the streaming business. We believe this is due to questions around the terminal economics of streaming, given large losses being generated today at Disney (>$1 billion dollars last quarter) and stagnating margins at peers such as Netflix. On the last earnings call, management highlighted three items that could lead to an inflection in DTC profitability over the next 12 months: a 38% price increase for Disney+ in the US; moderating growth in cash content expense; and an advertising tier for Disney+ launching in two months that can drive additional ARPU given high demand for the Disney brand amongst advertisers.”
1. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders: 252
In addition to being a tech giant, Amazon.com, Inc. (NASDAQ:AMZN) is considered a consumer discretionary stock given the company often sells more premium priced products on its online platform that consumers don’t necessarily need. Given the inflation, Amazon.com, Inc. (NASDAQ:AMZN)’s growth has slowed as a result and with the 47% year to date decline in the stock, Amazon.com, Inc. (NASDAQ:AMZN) could be attractive long term given its earnings growth potential.
Diamond Hill Capital Management commented on Amazon.com, Inc. (NASDAQ:AMZN) in a Q2 2022 investor letter,
“Amazon.com, Inc. (NASDAQ:AMZN)’s shares underperformed as valuations of fast-growing companies continued to compress in Q2. Amazon’s growth investments over the past two years have pressured earnings as consumer demand has been weaker than anticipated. However, we believe the company will be able to grow into its infrastructure investments over time. These investments have obscured the magnitude of sustainable free cash flow as well as the attractive valuation of the business relative to peers.”
With 252 hedge funds in our database long Amazon.com, Inc. (NASDAQ:AMZN) at the end of Q2, the company ranks #1 on our list of 12 Best Consumer Discretionary Stocks to Buy.
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Disclosure: None. 12 Best Consumer Discretionary Stocks to Buy is originally published on Insider Monkey.
