In this article, we will take a look at the 15 best consumer discretionary stocks to buy according to hedge funds.
The US stock markets are undergoing a positive euphoria as several analysts have started to believe the much-anticipated recession everyone was worried about for about a year now might not happen after all. This is because the Federal Reserve’s fight against inflation is slowly but surely bearing some fruit. Inflation is declining and major research institutions which were vehemently predicting recession are having second thoughts. These positive developments are having a direct impact on the consumer discretionary sector, which suffered when dark clouds were hovering over the US economy and financial markets. When things go south, consumers cut back on discretionary spending and only spend on essential items, making consumer discretionary stocks worst performers when common households are not doing good. But as recession clouds abate and consumer confidence begins to rebound, consumer discretionary stocks are back in action.
Deloitte published its State of the US Consumer report in July which shares some interesting insights that are directly linked to consumer spending and show what’s going on in US households when it comes to budget planning and spending. The report said that the percentage of respondents in the US who were concerned about their savings and who were delaying large purchases due to inflation fell in June, thanks to a clear fall in inflation. The report also said that “consumer spending intentions” rebounded in June after falling consistently for about a year. The Deloitte report retail sales jumped in May for the second straight month and they are already up about 31.6% from the pre-COVID levels.
Last month, a Wall Street Journal report highlighted an important trend that adds another positive development in the latest cycle of positive news. The report said that for several months just a handful of companies were responsible for all the gains of the S&P 500 index. But that trend is changing and major sectors are now adding to the broader market’s growth. Several stocks from the consumer discretionary sector were also noted to have added to the total market gains.
The WSJ report said that over 140 stocks in the S&P 500 index have hit fresh 52-week highs since the end of May. Some of the notable companies from the consumer sector adding to these gains include Amazon.com, Inc. (NASDAQ:AMZN), Lowe’s Companies, Inc. (NYSE:LOW) and McDonald’s Corporation (NYSE:MCD).
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Methodology
For this article we first listed all the holdings of the Consumer Discretionary Select Sector SPDR Fund. We then chose 15 of these companies with the highest number of hedge fund investors. To gauge hedge fund sentiment we used Insider Monkey’s database of 943 hedge funds.
Best Consumer Discretionary Stocks to Buy According to Hedge Funds
15. Ross Stores, Inc. (NASDAQ:ROST)
Number of Hedge Fund Holders: 53
Ross Stores, Inc. (NASDAQ:ROST) has performed well over the past year. Ross Stores, Inc. is up about 32% in the period.
Out of the 943 hedge funds tracked by Insider Monkey, 53 hedge funds reported owning stakes in Ross Stores, Inc.. The biggest stakeholder of Ross Stores, Inc. was Jean-Marie Eveillard’s First Eagle Investment Management which owns a $401 million stake in the company.
In its Q1 earnings call, Ross Stores, Inc.’s management, in a question on its plans to recapturing margins of pre-COVID times, said:
“Our long-term operating margin improvements are to be highly dependent on us delivering strong sales over a sustained period of time. And then the question on how long do inflationary pressures persist, but — over the longer term, we believe we can achieve gradual improvement in profitability. I think if you get into like, are there any structural questions related to that? We’re seeing tangible benefit in freight cost, but we’re still — these costs still are not at pre-pandemic levels. And then we’re seeing some wage pressures in the stores. When you talk about — we’ve guided to CapEx of $810 million. So a big component of that in addition to distribution center capacity, in addition to investing in the 100 new stores, a big chunk of that is technology investments that will drive further efficiencies within the stores and in our distribution centers.
So more automation in our distribution centers and some store initiatives that we’ve touched on in the past.
Madison Mid Cap Fund made the following comment about Ross Stores, Inc. in its Q1 2023 investor letter:
“The bottom five contributors for the quarter were Ross Stores, Inc. (NASDAQ:ROST), W.R. Berkley, Gartner, Glacier Bancorp, and Carlisle. Sales trends at Ross Stores remain so-so, with flattish sales compared to a year ago. The low-to-moderate income consumer has started to struggle as stimulus payments and government support initiatives from the COVID period are wearing off, and inflation is eating away at purchasing power.”
14. MGM Resorts International (NYSE:MGM)
Number of Hedge Fund Holders: 54
Hospitality and entertainment company MGM Resorts International (NYSE:MGM) ranks 14th in our list of the best consumer discretionary stocks to buy according to hedge funds. Earlier in August MGM Resorts International posted strong Q2 results.
Adjusted EPS in the quarter came in at $0.59, beating estimates by $0.07. Revenue in the quarter jumped 20.9% year over year to $3.94 billion, surpassing estimates by $140 million.
A total of 54 hedge funds in Insider Monkey’s database of 943 hedge funds reported owning stakes in MGM Resorts International. The biggest hedge fund stakeholder of MGM Resorts International was Keith Meister’s Corvex Capital which owns a $296 million stake in the company.
Cove Street Capital made the following comment about MGM Resorts International in its second quarter 2023 investor letter:
“As CEO Joey Levin pointed out in his Q1 quarterly letter, IAC traded at an enterprise value below its 18% stake in MGM Resorts International (NYSE:MGM) and 85% position in Angi (Ticker; ANGI)…meaning you effectively “get” 31% of Turo, the equity of publishing giant DotDash Meredith, Care.com, Vivian Health, and other IAC companies for “free”. MGM is seeing continued strength at its Vegas properties and now has the tailwind of China’s domestic re-opening for its Macau properties. This is one of our largest positions, and we remain confident in this portfolio of businesses and IAC’s ability to allocate capital.”
13. Caesars Entertainment, Inc. (NASDAQ:CZR)
Number of Hedge Fund Holders: 56
Caesars Entertainment, Inc. (NASDAQ:CZR) shares have gained about 30% year to date through August 6.
Out of the 943 hedge funds in Insider Monkey’s database, 56 funds reported having stakes in Caesars Entertainment, Inc. as of the end of the first quarter.
Caesars Entertainment, Inc. recently posted Q2 results for which revenue came in at higher than expected levels. Caesars Entertainment, Inc.’s management said the following in its latest earnings call:
“We delivered another strong quarter with consolidated EBITDA exceeding $1 billion. Operating trends within our property portfolio have remained strong, despite a tough year-over-year comparison, driven by a single large convention event, our Las Vegas segment delivered second best Q2, adjusted EBITDA of $512 million. Our Regional portfolio delivered $508 million in adjusted EBITDA down slightly last year. And finally, our Digital segment reported $11 million of adjusted EBITDA, the segments first quarter of profitability since we rebranded to Caesars Sportsbook in Q3 of ‘21. Underlying demand trends in Las Vegas remained strong during Q2, with occupancy growth of 100 basis points to 97.6%.”
12. Expedia Group, Inc. (NASDAQ:EXPE)
Number of Hedge Fund Holders: 62
Expedia Group, Inc. (NASDAQ:EXPE) is on investors’ radar after the company posted Q2 results. While adjusted EPS for the quarter surpassed estimates, Expedia Group, Inc. fell as its gross bookings missed estimates. Expedia Group, Inc. said travel demand in the second quarter remained strong.
A total of 62 hedge funds tracked by Insider Monkey were long Expedia Group, Inc. as of the end of the first quarter.
Aristotle Atlantic Core Equity Strategy made the following comment about Expedia Group, Inc. in its first quarter 2023 investor letter:
“Expedia Group, Inc. (NASDAQ:EXPE) provides online travel services for leisure and small business travelers. The company offers a wide range of travel shopping and reservation services, as well as provides real-time access to schedule, pricing and availability information for airlines, hotels and car rental companies. Expedia serves customers worldwide.
We see Expedia benefiting from the growth of booking travel online, both for leisure and in corporate travel. The company also benefits from rapid growth in alternative accommodations, vacation home rental, through VRBO. The main sources of revenue and profitability are from hotel and vacation home rental. Additionally Expedia has exposure to airline ticket sales and automobile rentals. Post the COVID-19 pandemic, Expedia’s debt has been reduced and share repurchase has resumed and we would expect a dividend to be reinstated.”
11. Hilton Worldwide Holdings Inc. (NYSE:HLT)
Number of Hedge Fund Holders: 63
Hilton Worldwide Holdings Inc. (NYSE:HLT) in late July posted Q2 results according to which adjusted EPS in the period came in at $1.63, beating estimates by $0.05. Revenue in the quarter jumped 18.8% year over year to $2.66 billion, surpassing estimates by $100 million.
For full year 2023, system-wide RevPAR is expected to increase between 10% and 12% on a comparable and currency neutral basis compared to 2022.
Out of the 63 hedge funds that reported having stakes in Hilton Worldwide Holdings Inc. as of the end of the first quarter, Bill Ackman’s Pershing Square had a $1.31 billion stake in the company.
10. McDonald’s Corporation (NYSE:MCD)
Number of Hedge Fund Holders: 64
Strong dividends and an evergreen business model are just two of the long list of reasons why hedge funds love McDonald’s Corporation. Recently, McDonald’s Corporation posted strong Q2 results. Adjusted EPS in the period came in at $3.17, beating estimates by $0.38. Revenue in the quarter jumped 13.6% year over year to $6.5 billion, beating estimates by $210 million. Global comparable sales in the period jumped 11.7% in the quarter.
A total of 64 hedge funds reported having stakes in McDonald’s Corporation. The biggest stakeholder of McDonald’s Corporation was Paul Marshall and Ian Wace’s Marshall Wace LLP with a $459 million stake in the company.
9. The Home Depot, Inc. (NYSE:HD)
Number of Hedge Fund Holders: 65
The Home Depot, Inc. (NYSE:HD) in June reaffirmed its FY’23 guidance. A total of 65 hedge funds in Insider Monkey’s database of hedge funds reported having stakes in The Home Depot, Inc..
8. Lowe’s Companies, Inc. (NYSE:LOW)
Number of Hedge Fund Holders: 67
Home improvement company Lowe’s Companies, Inc. ranks 8th in our list of the best consumer discretionary stocks to buy according to hedge funds. A total of 67 hedge funds in the database of 943 hedge funds maintained by Insider Monkey held stakes in Lowe’s Companies, Inc. as of the end of the first quarter.
Baron Real Estate Fund made the following comment about Lowe’s Companies, Inc. in its first quarter 2023 investor letter:
“Lowe’s Companies, Inc. (NYSE:LOW) is the second-largest home improvement center in the U.S. The company has several competitive advantages including scale, distribution efficiencies, interconnected retail through stores/internet, excellent management, and a strong balance sheet. The company’s P/E multiple is only 14 times versus its long-term average P/E multiple of 18 times.”
7. Starbucks Corporation (NASDAQ:SBUX)
Number of Hedge Fund Holders: 69
Insider Monkey’s database of 943 hedge funds shows that 69 elite hedge funds had stakes in Starbucks Corporation (NASDAQ:SBUX) as of the end of the first quarter. The most significant stakeholder of Starbucks Corporation was Ken Griffin’s Citadel Investment Group which owns a $329 million stake in the company.
Starbucks Corporation recently posted mixed fiscal Q3 results. Starbucks Corporation’s management talked about guidance for Q4 and full year and the company’s latest earnings call:
“Despite the macroeconomic environment variables, we are poised to move our earnings growth guidance as it reflects the strength of our brand globally and the long-term durability that we are building through our reinvention plan. As it relates to our remaining guidance, we are pleased to reaffirm full year guidance on all other measures. As a reminder, that includes revenue growth of 10% to 12%, global comp growth near the high end of 7% to 9% and solid margin expansion. Store growth, capital spend and tax rate guidance also remain unchanged from what we shared previously. As a reminder, we expect an unfavorable impact from foreign currency translation of approximately 2 percentage points to 3 percentage points on fiscal year 2023 revenue and earnings, respectively.
With that, let me provide further detail around our Q4. First, in regard to International. Looking ahead to the balance of the year, we expect our International segment Q4 margin to expand year-over-year but to be meaningfully lower than Q3 due to seasonality along with accelerated digital and store renovation investments. Second, in regard to China, as I noted earlier, we expect China’s average weekly sales to continue to sustain the growth quarter-over-quarter, resulting in average weekly sales growth of low to mid-single digits in Q4, with similar sized comp growth as the market is lapping government stimulus for customers and favorable discounting from prior year coupled with the timing of difference of the Mid-Autumn Festival, which all contributed to prior year transaction growth.”
The London Company Large Cap Strategy made the following comment about Starbucks Corporation in its second quarter 2023 investor letter:
“Starbucks Corporation (NASDAQ:SBUX) – Sentiment on SBUX turned more negative in this uncertain macro environment with the impending return of student loan payments in the U.S. SBUX reported very strong results for the Jan-March quarter, but exercised caution by not raising guidance. SBUX is beginning to realize tailwinds from the re-opening of the Chinese economy, adding a buffer to growth and margins for the remainder of the year.”
6. General Motors Company (NYSE:GM)
Number of Hedge Fund Holders: 73
General Motors Company (NYSE:GM) ranks 6th in our list of the best consumer discretionary stocks to buy according to hedge funds. General Motors Company recently posted strong Q2 results and also upped its full-year 2023 guidance. In the second quarter General Motors Company’s adjusted EPS in the period came in $1.91, beating estimates by $0.08. Revenue in the period jumped 25.1% year over year to $44.75 billion, surpassing estimates by $2.39 billion. Like GM, Amazon.com, Inc., Lowe’s Companies, Inc. and McDonald’s Corporation are some of the best consumer discretionary stocks to buy according to hedge funds.
5. The TJX Companies, Inc. (NYSE:TJX)
Number of Hedge Fund Holders: 73
Off-price department store company The TJX Companies, Inc. (NYSE:TJX) ranks 5th in our list of the best consumer discretionary stocks to buy according to hedge funds.
Insider Monkey’s database of 943 hedge funds shows that 73 funds have stakes in The TJX Companies, Inc. as of the end of the first quarter. The biggest hedge fund stakeholder of The TJX Companies, Inc. was Panayotis Takis Sparaggis’s Alkeon Capital Management which owns a $413 million stake in the company.
Artisan Global Equity Fund made the following comment about The TJX Companies, Inc. in its Q4 2022 investor letter:
“Also, shares of The TJX Companies, Inc. (NYSE:TJX), an off-price retailer of apparel and home goods across North America, Europe and Australia, rose on strong Black Friday sales and market share gains as shoppers searched for deals in physical stores. The company showed that it is maintaining margins and beating earnings estimates on strong sales and by selectively raising prices. TJX’s business model is to sell brand name and designer merchandise in limited quantities at every day discounted prices in stores with flexible, low-cost layouts. Its strategy is to tap into shoppers’ psychological need to “treasure hunt,” as the company describes it, to find unique, branded items at deep discounts. TJX buyers opportunistically purchase merchandise from vendors at deep discounts to keep the cost of goods low for stores. As the largest off-price retailer, the company has used its channel power to its advantage in recent months to gain steep discounts on merchandise as other retailers struggle to clear their inventory. We appreciate the company’s inventory management and pricing prowess. This holding is an example of our broad universe of companies that we consider for the portfolio and one that we believe is well-positioned for the current market environment.”
4. Booking Holdings Inc. (NASDAQ:BKNG)
Number of Hedge Fund Holders: 77
Booking Holdings Inc. (NASDAQ:BKNG) is trading higher after the company recently posted strong Q2 results, helped by a boost in leisure travel demand. Booking Holdings Inc.’s adjusted EPS in the period came in at $37.62 beating estimates by $8.46. Revenue in the quarter jumped 27% year over year to $5.5 billion, surpassing estimates by $330 million. Room nights booked jumped 9% in the quarter on a year-over-year basis.
In the latest earnings call, Booking Holdings Inc.’s management talked about its expectations for Q3 and full year:
“We expect Q3 sales and other expenses as a percentage of gross bookings to be about 20 basis points higher last year primarily due to higher gross bookings mix. We expect our more fixed expenses in Q3 to grow year-over-year about 30% due to higher personnel and related expenses, higher IT expenses including the impact of phasing from Q2, and higher indirect taxes in G&A. The year-over-year growth in our more fixed expenses includes about seven percentage points from changes in FX. The difference between the 20% growth in our more fixed expenses in Q2 and a 30% growth in Q3 is driven mainly by FX and major one. Taking all into account, we expect adjusted — we expect Q3 adjusted EBITDA to be around 20% higher than last year. Given the strong level of bookings that we’ve seen, we are updating our commentary for the full year.
We currently expect gross bookings to grow slightly over 20%, up from our previous expectation for low teens growth. We expect full year room night growth in the mid-teens and constant currency combination ADRs were up slightly for the year, including a couple of points of pressure from changes in regional mix. We currently expect revenue as a percentage of gross bookings to increase year-over-year by about 20 basis points down from our previous expectation of 50 basis points increase. The reduction in our full year take rate is driven by less of a benefit from timing including due to the higher growth rate we expected earlier in this year and also due to expanded booking window. Also, from stronger performance, which drove a higher mix of flights than expected earlier in the year.”
3. NIKE, Inc. (NYSE:NKE)
Number of Hedge Fund Holders: 81
NIKE, Inc. (NYSE:NKE) is one of the best consumer discretionary stocks to buy according to hedge funds. Morgan Stanley recently made some changes to its Dividend Equity Portfolio. In the Consumer category NIKE, Inc. features on the portfolio as Morgan Stanley has an Overweight rating on the stock.
NIKE, Inc. in June posted mixed quarterly results as it missed EPS estimates for the fiscal fourth quarter. NIKE, Inc. however beat sales guidance. Its sales in China were also strong.
A total of 81 hedge funds out of the 943 tracked by Insider Monkey had stakes in NIKE, Inc. as of the end of the first quarter of 2023.
Ensemble Capital Management made the following comment about NIKE, Inc. in its second quarter 2023 investor letter:
“NIKE, Inc. (NYSE:NKE) (-9.7%): Nike struggled in the quarter as it continues to work off excess inventory built up during COVID and recalibrate its distribution channels between wholesale and direct-to-consumer selling models. Foot Locker, which is a major Nike retailer, fell after its second quarter earnings on news that it was aggressively marking down inventory, which investors took as a sign that Nike’s margins may suffer for the remainder of the year.”
2. Tesla, Inc. (NYSE:TSLA)
Number of Hedge Fund Holders: 82
Tesla, Inc. (NYSE:TSLA) shares were trading in the red as of August 5 amid latest probes from regulatory authorities around its car systems and a decline in deliveries in China. Tesla, Inc. sold 64,285 China-made electric vehicles in July, down 31% from June. This also marked the lowest levels of deliveries 261,105 passenger vehicles.
A total of 82 hedge funds tracked by Insider Monkey were bullish on Tesla, Inc. as of the end of the first quarter of 2023. The most notable hedge fund stakeholder of Tesla, Inc. during this period was D. E. Shaw with a $1.3 billion stake in the company.
Baron Opportunity Fund made the following comment about Tesla, Inc. in its Q1 2023 investor letter:
“Tesla, Inc. (NASDAQ:TSLA) designs, manufactures, and sells EVs, related software and components, and solar and energy storage products. Following a sharp decline at the end of 2022, Tesla’s stock rebounded in the first quarter of 2023 on investor expectations that Tesla will continue to grow vehicle deliveries and maintain solid gross and operating margins despite a potential recession, competition in China, and vehicle price reductions. We wrote a long piece on Tesla last quarter and refer readers back to it, because for long-term investors not much has changed over the last three months. Tesla did hold its first Investor Day in March, and several Baron analysts and portfolio managers attended. We toured the Austin Gigafactory, drove in a Cybertruck, boarded a Semi truck, and spoke with a wide swath of Tesla senior managers. During the formal presentation, Tesla highlighted, among other things: (1) its broad and deep bench of executive talent supporting CEO Elon Musk; (2) its “Master Plan 3–Sustainable Energy for All of Earth,” which featured EVs, renewable power from solar and wind, and stationary electric storage; (3) its vehicle assembly innovations, including massive casted parts (building Model Y bodies with single front and rear castings, replacing a substantial number of parts and fastening steps), a stainless steel exoskeleton (for Cybertruck), and its next-generation highly efficient “unboxed process” for its next-gen $25,000 vehicle; (4) a future permanent[1]magnet electric motor that will not require any rare earths; and (5) the massive untapped market opportunity for commercial stationary electric storage, branded Megapack, as the world steadily shifts to renewable energy. As long-term shareholders, we have witnessed Tesla exploit its innovative Model 3/Y now-global mass-market platform to increase vehicle deliveries from barely a standing start to over 1.3 million units, while achieving industry-leading margins and reinforcing its iron-clad balance sheet to almost $23 billion in cash (and effectively no recourse debt). We expect Tesla’s
1. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders: 243
Amazon.com, Inc. tops the list of the best consumer discretionary stocks to buy according to hedge funds. Amazon.com, Inc. is in the limelight after the company posted strong Q3 guidance as its Q2 results also beat estimates. Needham analysts Laura Martin and Dan Medina upped their price targets for Amazon.com, Inc. stock to $160 from $150. The analysts praised Amazon.com, Inc.’s cost-cutting measures and high margins. They also like Amazon.com, Inc.’s AI initiatives.
A total of 243 hedge funds tracked by Insider Monkey reported owning stakes in Amazon.com, Inc. as of the end of the first quarter. The biggest stakeholder of Amazon.com, Inc. during this period was Natixis Global Asset Management’s Harris Associates with a $2.4 billion stake.
The Ithaka Group made the following comment about Amazon.com, Inc. in its second quarter 2023 investor letter:
“Founded in 1994, Amazon.com, Inc. (NASDAQ:AMZN) has evolved from its early roots as an online bookstore to become one of the world’s largest eCommerce retailers. At the end of 2022 Amazon stood poised to capture ~40% of all US e-commerce sales, representing five times more share than the next closest competitor. In addition to eCommerce, Amazon Web Services (“AWS”) has become the market leader in outsourced cloud infrastructure. Further, Amazon Advertising is garnering significant share in digital advertising, particularly product placement ads, thanks to consumers beginning their product searches on Amazon’s site. Despite providing tepid forward guidance on its 1Q23 earnings call, Amazon’s stock appreciated on the back of increased confidence the company would be able to contain expenses and push operating margins above prior peaks in the near-to medium term.”
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originally published on Insider Monkey.
