I don't know if you've tried to do anything lately, but if you have, you know you're paying through the nose for it.
Amusement parks? Expensive.
The casino? Expensive.
Funerals? Well, we hope you're not exactly burning through caskets, but yes, they're expensive, too.
So … wouldn't you at least like to make a little cash on these transactions?
Ok. Buying consumer discretionary stocks isn't exactly that direct. But they can help you tap Americans' spending on a wide variety of the non-essential goods and services that we buy when we have a little extra cash to spare.
Today, I'm going to lead you through a quick primer on consumer discretionary stocks, explain why you'd want to invest in them, then talk to you about how to find the best consumer discretionary stocks to buy.
What are consumer discretionary stocks?
The companies responsible for consumer goods and services are largely divided into two stock sectors: consumer staples and consumer discretionary.
You'll occasionally see staples and discretionaries classified as "needs" and "wants," respectively. It's somewhat accurate, but not totally. A better way to think about them is this:
Consumer staples are producers and retailers of goods you not only need, but need on a daily or regular and frequent basis. The companies that make just about everything you can get at a grocery store – from food and beverages to toothpaste and toilet paper – are consumer staples stocks. (The grocery stores are, too.)
Consumer discretionaries, meanwhile, are producers and retailers of goods and services you might not only want, but also of goods and services you need … just not as frequently as staples. For instance, no one really needs a fast-food burger or a coffee-shop latte – they're wants. But you might need a car to get to your job, and you certainly need a pair of shoes on your feet – they're needs, you just won't buy them as often as you buy groceries. But the companies that provide all these things are all examples of discretionary stocks.
This sector covers a wide swath of businesses, including:
Retailers: These are the stores we visit to buy clothing, electronics, furniture and other goods that we desire but can live without. Examples: Amazon (AMZN), Home Depot (HD).
Restaurants & Entertainment: From dining out to catching the latest blockbuster at the cinema, these companies cater to our desire for experiences. Examples: McDonald's (MCD), Starbucks (SBUX).
Automotive: Companies in this sector manufacture and sell vehicles, parts, and accessories. Examples: Tesla (TSLA), O'Reilly Automotive (ORLY).
Leisure & Hospitality: Think hotels, resorts, and travel companies – everything we indulge in when we're seeking relaxation or adventure. Examples: Hilton Worldwide (HLT), Booking Holdings (BKNG).
"But wait," you say. "I thought Amazon and Tesla were tech stocks."
In many cases, what a stock "feels like" isn't necessarily in line with how the Global Industry Classification Standard (GICS) and other systems classify companies. Amazon is extremely intertwined with technology, but its core business is indeed retail. Tesla's vehicles are extremely tech-heavy, but ultimately, it's an automaker.
Why do investors buy consumer discretionary stocks?
If you have a few spare minutes, take a look at the long-term stock charts of some of the names listed above.
At the risk of sounding glib, that's why investors buy consumer discretionary stocks.
Consumer discretionary stocks as a whole are a bet on the broader economy, and in the U.S., that has historically been a fantastic bet. On an individual basis, today's single-location burger shack can turn into a global burger powerhouse; an online marketplace for books can become one of the world's largest retailers (and a cloud giant to boot!); a lone coffee, tea and spice store in Seattle's Pike Place Market can become not just the world's largest coffee chain, but across many places on this planet, a status symbol in a cup.
In short: They can deliver untold growth.
And honestly? At least some of the interest in consumer discretionary stocks is the familiarity – we feel a connection to these brands, and by extension, we know them somewhat better than we do more detached sectors such as materials and industrials.
"People who invest in consumer discretionary stocks may enjoy that it's a sector full of products and services that we interact with every day," says TD Bank. "It can be easy to understand how the things companies are selling work as well as the economic shifts that impact these operations because we feel them ourselves. For novice investors, these businesses can seem more tangible and directly connected to the broader economy than other industry sectors."
Just remember that the consumer discretionary sector's arrow doesn't always point north.
Consumer discretionary stocks are often referred to as "consumer cyclicals" because of their highly cyclical nature. When the economy is roaring, people tend to empty their wallets into "wants," whether that's TVs and sneakers or movie tickets and vacations. But when the economy pulls back, so too do spenders, who must conserve their money for more necessary (staples) purchases. That's why Staples stocks are considered "recession-proof." Discretionaries? Not so much.
How do you find the best consumer discretionary stocks?
Maybe you want mega-cap brands, or maybe you want punchier small-cap stocks. Maybe you care about value, or maybe you want growth at all costs.
We can't tell you exactly what you'd want when looking for the best stocks to buy in the consumer discretionary sector. But we can help you start your search with a basic quality screen.
To get to the following list of consumer discretionary stocks, we've looked for names …
Within the S&P Composite 1500: This index is a combination of the S&P 500, S&P MidCap 400, and S&P SmallCap 600. This screen allows for stocks of different sizes, but it still represents roughly 90% of America's market capitalization, weeding out the smallest stocks.
With a long-term estimated earnings-per-share growth rate of at least 8%: Given that consumer discretionary stocks are expected to be more growthy than their defensive-minded staples brethren, we'll want a better earnings growth rate than what we look for in the best consumer staples stocks. I've set the bar at 8% annual growth, vs 5% for staples. (Just remember: Expectations don't guarantee results.)
With at least five covering analysts: We'd like to look at stocks that are on Wall Street analysts' radar, which makes it likelier that there's both more reporting and more insights on these companies. The more research we have at our disposal, the more educated a decision we can make.
With a consensus Buy rating: All of the stocks must have an average broker recommendation of 2.5 or less within S&P Global Market Intelligence's ratings scale. S&P Global Market Intelligence converts analyst ratings into a numerical scale. Anything with a score of 2.5 or less is considered a Buy.
With a dividend yield of at least 1.5%: Dividends are a nice top-up to the growth you can expect out of discretionary names. So we've set a minimum dividend yield of 1.5% for the companies that pay shareholders, which ensures that we get a little more income than the S&P 500 (current yield: 1.2%). That said, if you want to go all-in on growth, consider trying out a screen similar to what we've produced today, but backing out the dividend yield entirely.
