Investing in Consumer Discretionary Stocks
In general, consumer discretionary stocks had a rather torrid time in 2022, a year which was defined by economic uncertainty, high inflation and rising interest rates. Whilst the global economic outlook remained uncertain throughout 2023, inflation is at least beginning to cool, which could benefit consumer discretionary companies.
But what are consumer discretionary stocks? And why would investors consider adding them to their portfolio? In this article, we will answer these questions and highlight a few consumer discretionary stocks for investors to keep an eye on in 2024.
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What Are Consumer Discretionary Stocks?
Goods and services can be split into two categories, things we need and things we want. The former of these are known as consumer staples, whilst the latter fall into the bracket of consumer discretionary. Consumer discretionary stocks, therefore, are the shares of companies which produce and/or sell these type of goods and services.
Whilst consumers will always find money to purchase consumer staples, consumer discretionary items represent goods and services which consumers will purchase when they can afford to, but will likely be the first casualties when the time comes to reassess a budget.
Why Invest in Consumer Discretionary Companies?
We can contrast consumer discretionary stocks with consumer staples stocks. As demand for consumer staples tends to remain fairly consistent, the companies which produce these goods and services tend to mirror this consistency in their performance.
On the other hand, consumer discretionary stocks tend to be cyclical, performing well when the economy is growing and poorly when the economic outlook is negative or uncertain.
Consumer staples stocks tend to increase in popularity in times of market uncertainty, as investors crave the reliability which they provide. However, in times of economic boom, consumer discretionary stocks often become more desirable.
This is due to the fact that, when consumer confidence and demand are high, consumer discretionary items receive increased demand and, consequently, the companies which produce and/or sell these items offer higher growth potential.
As market uncertainty has continues into 2024, it may not seem like an opportune moment to invest in consumer discretionary companies. However, inflation is slowing in many economies, which should have a positive effect on consumption, although this will potentially be offset by higher interest rates.
Furthermore, after a rough 2022, the prices of many consumer discretionary shares fell, which can sometimes provide interesting opportunities for savvy investors to pick up shares in quality companies at a lower price.
Top Consumer Discretionary Stocks to Watch
There are many different consumer discretionary stocks on the market to choose from. Unlike consumer staples which, by definition, tend to benefit from resilient demand, the ability of consumer discretionary companies to weather a market downturn varies considerably.
Given ongoing economic uncertainty, it is worth considering consumer discretionary stocks which benefit from strong branding and loyal consumer followings. In the following sections, we will highlight two such stocks.
The Walt Disney Company
The US media and entertainment giant needs little introduction. After the initial shock of the pandemic, Disney shares recovered and became one of the biggest beneficiaries of social restrictions, largely thanks to the startling subscriber growth of its nascent Disney+ streaming service.
However, after hitting an all-time high in March 2021, share price has been trending downwards, and is down almost 50% at the time of writing.
Just as much of the stock’s pandemic era gains were attributable to Disney+, so too are the subsequent losses. Despite rapid subscriber growth, staggering content costs coupled with low pricing led to big losses for the division. So much so that ex-CEO Bob Iger was brought out of retirement to help steady the ship.
Subsequently, an increase in prices has helped ease losses in the latest quarter ended 1 April 2023, yet has also led to an unexpected drop in subscribers, which spooked investors.
However, if managed efficiently, its streaming service has the potential to reward Disney and complement its other divisions in the future. One of the entertainment giant’s big competitive advantages is its vast array of intellectual property, which provides plenty of opportunity for original streaming content based on hugely popular brands and franchises.
Furthermore, Disney’s theme parks, which have always been a key revenue driver for the company, have bounced back since the dark days of the pandemic and are currently thriving.
Starbucks
Although for many people a morning cup of coffee is a necessity, buying it in an expensive coffee shop, such as Starbucks, is not.
Nevertheless, the company’s strong brand and high level of popularity mean that, for many, their daily Starbucks would be one of the last discretionary items they cut from their budget.
This was evidenced in Starbuck’s results for their fiscal year 2022. Despite high inflation and rising interest rates squeezing consumer budgets, total net revenues rose by 11%. However, higher operating costs led to a 5% fall in operating income.
In the first six months of fiscal year 2023, total net revenue climbed a further 11% and, despite operating costs rising by 10%, operating income soared 21%.
Although the stock plunged 40% within the first six months of 2022, it subsequently went on a bull run which saw share price rise 50% over the next 12 months. At the time of writing, share price is hovering around 17% below its all-time high.
Starbucks is also a dividend-paying stock, having increased its annual dividend payments every year since they were first introduced in 2010. Currently, the stock has a dividend yield of around 2%.
Consumer Discretionary ETF
What if you’re interested in gaining exposure to the consumer discretionary sector ahead of the next economic expansion, but not interested in picking out individual stocks? In this case, a consumer discretionary ETF (Exchange-Traded Fund) may be a good option.
A consumer discretionary ETF uses a pool of investor money to invest in consumer discretionary companies, allowing investors to gain exposure to a number of different businesses through a single investment. An example of this is the Vanguard Consumer Discretionary ETF. At the time of writing, this ETF’s largest five holdings are in Amazon, Tesla, Home Depot, McDonald’s and Nike.
Investing in Consumer Discretionary Stocks
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