Many investors are shying away from one economic sector that they’re quite familiar with: the consumer discretionary group. That’s partly because of discomforting headlines screaming that most retailing companies are struggling and spiraling down. So most analysts on Wall Street would rather look elsewhere for stock bargains.
Not so fast, say some investors who are still bullish on the consumer discretionary sector, particularly since most of these stocks have pulled back given the sector’s travails. These intrepid investors believe consumer spending on discretionary goods will rise smartly this year, both in the U.S. and abroad.
“That’s good news for a wide range of companies that sell directly to the consumer, whether they’re peddling expensive jewelry, family outings to amusement parks, electronic devices and much more,” said Stephen Leeb, president of Leeb Asset Management. One reason he foresees faster-than-projected growth in the U.S. stems from a likely federal tax cut, especially if bundled with strong infrastructure spending.
Beyond the U.S., he figures that “European economies on balance are gathering steam, while the developing world, despite a modest slowdown in China, is also expected to notch an increase.”
Leeb noted three “trustworthy indicators” that back up this positive assessment of the growth outlook. First, “manufacturing has come on strong in the U.S., Europe and China. Second, wages in the U.S. are finally on the upswing. And third, unemployment has fallen to multiyear lows.
Some analysts say the obvious beneficiaries will be the major consumer discretionary stocks with long histories of earnings growth and free cash flow. Plus, they’re still relatively undervalued based on their forward earnings and price-earnings ratios and healthy dividend yields.
Here are four large-cap stocks that fit the bill, according to Leeb:
Tiffany (TIF), a premier maker and global retailer of gems and jewelry, should definitely benefit from lower U.S. taxes and higher incomes, spurring the wealthy into spending and expanding the pool of people who can afford its offerings. Even during the recession and tepid economic recovery, the 180-year old company managed to maintain double-digit growth, part of which was due to its growing presence in China, where gold jewelry is viewed as an investment.
A corporate shakeup, in which the board picked three new directors, sent the stock flying last month. The board is seeking a replacement for former CEO Frederic Cumenal. So stay tuned.
Apple (AAPL), long considered a robust growth company, is now being purchased as a value/income play as the stock qualifies in all those categories. Leeb noted that Apple will benefit as consumers chose it, given the problems besetting rival smartphone maker Samsung. Longer term, Apple will reap rewards from growing services such as the Apple Store and proprietary apps like Siri.
Approximately 10 percent growth and a forward cash flow yield of about 10 percent “are compelling fundamentals for the world’s most valuable company. This is a superb holding for conservative income-oriented investors,” said Leeb.
Amazon (AMZN), the online giant, is the world’s largest retailer based on market capitalization and continues to grow at a fast clip. That’s partly due to its expanding list of Prime subscriber benefits and management’s innovative spirit. Other retailers are always measured on how they’re competing -- or not -- with Amazon.
“And now earnings, after being ignored in favor of an obsessive focus on expanding the revenue base, are starting to explode,” said Leeb. “You could say that despite a nosebleed P/E (50), expected growth of nearly 50 percent leaves the stock with a relatively modest PEG [price/earnings/growth] ratio,” said Leeb. “We rate Amazon as the best large-cap growth company in the world.”
Tractor Supply (TSCO), which operates 1,600 rural lifestyle retail stores in 49 states, is as dominant outside urban America as Amazon is globally. But this year analysts expect a surprising lift in sales.
Its 10-year growth rate already tops 20 percent but with domestically drilling chilled for the past couple of years, it’s not surprising that growth in 2015 and 2016 was held to about 10 percent. But this year “we expect an upside surprise with higher oil prices that should to a lead to a pickup in drilling,” said Leeb.
He noted that as a 100 percent domestic company, Tractor Supply will receive maximum benefits from any tax changes. And its recent acquisition of a pet store chain PetSense should expand the company’s presence in suburban markets.
Said Leeb: Tractor Supply “is a great growth stock trading a historically low valuation.”