Consumer spending powers most of the world's economic growth. That simple fact has made consumer-focused businesses a favorite among investors. In addition to their potential for eye-popping sales gains, these companies tend to own valuable, durable brands that support robust profitability.
Their businesses -- and balance sheets -- are also easier to understand compared to bank stocks or insurance companies. And, in many cases, investors can purchase the stock of a company that they routinely patronize, thus taking advantage of the Wall Street maxim, "buy what you know."
The consumer segment of the stock market is divided into two basic camps. So-called consumer staples stocks focus on products that are priorities in most household budgets, including toiletries, home cleaning supplies, and certain foods and beverages. But today we're looking at a few top stocks in the consumer discretionary segment, which involves products and services that aren't essentials, but that still satisfy shoppers' desires when they have extra cash to spend.
Here are some consumer discretionary stocks worth considering for your portfolio:
1. TJX Companies
The best consumer discretionary stocks pair the stability of a consumer staples business with a higher level of growth. TJX Companies (NYSE:TJX) is a great example of that powerful combination of investment characteristics.
The owner of the retailing banners of TJ Maxx, Marshalls, and Home Goods, TJX Companies is a veteran of the retailing industry. In fact, its average Marshalls and TJ Maxx store has been in place for 20 years, during which time local shoppers have come to rely on it when they're looking for quality, off-price apparel, or home goods. In many cases, they can find the same product they'd see at a department store or luxury apparel retailer, but at discounts of 20%-60%.
Yet the company is far from mature, meaning it has plenty of room to continue growing. Comparable-store sales sped up to 6% in fiscal 2019 from 2% in the prior year thanks to rising customer traffic across each of its sales divisions.
That market-thumping growth rate slowed through the first half of fiscal 2020, but CEO Ernie Herrman and his team still noted rising customer traffic and healthy profit margins, which are indicators of continued loyalty on the part of shoppers.
Stepping back, the business appears even more attractive when you consider its current growth streaks. Comps have risen in each of the last 23 years, for example, and customer traffic has ticked higher for 20 consecutive quarters in the core U.S. business. These wins help demonstrate the wide appeal of the off-price selling model through many different economic environments.
TJX Companies is aiming to use a healthy chunk of its operating cash to expand the business over the next few years. Management sees room to add 1,800 new stores to the base just in the current geographies it serves (i.e., Canada, the U.S., Europe, and Australia). Hitting that target would bring it selling footprint up to 6,100 locations.
It has only just started to attack the online channel, too, which promises to speed gains in 2020 and beyond. After all, TJX Companies' 6% reported comps growth last year didn't include any digital revenue from the online segment, in contrast to the results from other major national retailers like Walmart (NYSE:WMT) and Target (NYSE:TGT).
Importantly, investors don't need to count on the best-case scenario of robust annual market-share gains for this stock to deliver healthy returns. TJX Companies' leadership position helps it generate market-thumping profitability, and management has made a priority out of returning cash to shareholders through stock repurchases and dividends. Two more annual hikes, in fact, and the company will join just a handful of other retailers as a Dividend Aristocrat that has raised its dividend for at least 25 consecutive years.
That mixture of growth and income should help cushion investor returns during those inevitable economic slumps. And it's a key reason why TJX Companies is a compelling stock to keep to your watchlist.
Investors were down on Nike (NYSE:NKE) stock in early 2019 thanks to a few worries that -- even if they all play out -- amount to just a temporary speed bump in an otherwise impressive long-term growth story. Sure, the sports apparel giant is facing global trade-related cost pressures and the prospect of slowing growth in its core U.S. market. There are rivals seeking to etch away at its positive market-share momentum, meanwhile, including Adidas, lululemon athletica, and Under Armour.
You still might be attracted to Nike stock for all the usual reasons. These include its dominant market position, with global sales of nearly $40 billion (compared to Under Armour's $5 billion or Adidas' $26 billion). Nike's innovation and marketing platform create a near-unchallengeable competitive asset, too. The company spent $3 billion on advertising and branding support in fiscal 2019 while launching new products at a scale and pace that rivals couldn't even approach. That's a key reason the company is on pace to notch a third straight year of record earnings in fiscal 2020.
Consider its growth potential in China, which is an underappreciated part of Nike's business today. That business unit expanded at a 24% clip last year. the figure is even more impressive considering its sharp growth from an already sizable base figure. Nike added $1 billion of revenue to its annual base there in just 12 months. That's equivalent to one-quarter of Lululemon's total sales base in incremental revenue in one fiscal year. Given that performance, it's no wonder that CEO Mark Parker told investors that Nike can expand the sports and fitness industry in China while capturing more than its fair share of the growing pie. "We're confident that we'll continue to grow [the sports segment] and our business in China for decades to come," he said in a conference call with investors.
Granted, that growth rate would become harder to achieve if the Chinese economy slows down or enters a recession. But demographic trends alone support a bullish reading for trusted consumer brands like Nike over the long term.
Meanwhile, investors have good reasons to expect this consumer discretionary giant to keep benefiting from positive shifts in the industry. Tighter supply in the U.S. market, coupled with a faster launch platform, means Nike isn't as susceptible to big inventory surpluses like the one that pressured earnings in 2017. Sales are moving more toward direct online purchases, too, and cutting out middleman retailers such as Foot Locker and Nordstrom is proving great for profitability. Executives estimate that e-commerce sales carry about twice the margin as wholesale purchases, and so it's good news that this segment is expanding toward 50% of the business.
It's true that the size of this company means it isn't likely to double its revenue base in a few years, which could happen for Lululemon if its international expansion goes to plan. But Nike has already achieved a global selling footprint that reaches across several sports categories. There's plenty of room for investors to continue profiting from that unique industry position.
3. Activision Blizzard
Activision Blizzard (NASDAQ:ATVI) shares crossed back into positive territory in the fall of 2019 after trailing the market for most of the year. Still, the late-summer rally doesn't mean it's too late to buy into this top-notch video game developer.
After posting uncharacteristic misses in its prior two quarterly reports, Activision got back to its expectation-beating ways in early August when it announced surprisingly strong second-quarter sales and profits. Revenue landed at $1.4 billion compared to the $1.32 billion that CEO Bobby Kotick and his team had predicted, and the outperformance was powered by rising audience levels in core franchises like World of Warcraft, Candy Crush, and Call of Duty.
These successes have investors feeling confident that the developer's recent streak of gamer losses could finally be ending, as the business stabilizes after dealing with the impact of the split with the Destiny franchise and surging popularity for Epic Games' Fortnite and similar Battle Royale titles.
The timing couldn't be better for its return to growth, given that Activision has a huge slate of content set to launch in late 2019 and early 2020. A major World of Warcraft update is already re-igniting subscriber growth in that tentpole brand, but that's just the start. Activision reorganized its business to devote much more resources toward brands like WoW and Call of Duty, and investors are looking forward to the early results from that shift, likely beginning right around the holiday season crush.
Peers like Electronic Arts and Take-Two Interactive also have exciting launch calendars ahead. But Activision's bigger, more flexible portfolio should help it deliver more consistent earnings over the next decade.
Few national retailers have handled the shift toward multichannel retailing as well as Target has. Its success has been so impressive, in fact, that it can be hard to remember that investors feared the worst for the company just a few years ago.
Target announced a risky strategic change in late 2017 that involved pouring cash into its store base while simultaneously cutting prices so that it could compete more effectively with e-commerce giants and peers like Walmart. The announcement was met with jeers on Wall Street, with many investors predicting reduced earnings power and falling market share well into the future.
Things have turned out much better than those fears implied. In fact, Target is currently enjoying its highest customer traffic growth in over a decade, with comparable-store sales landing at near 5% in each of the last two quarterly reports, compared to 3% growth for Walmart.
Target's digital growth is powering most of that success, but this isn't simply a case of higher e-commerce sales. Instead, the chain is using its network of stores to offer unbeatably flexible fulfillment options including in-store pickup and home delivery. In other words, rather than being an albatross as many investors feared it would be, the chain's physical store base is a key competitive asset as more shopping shifts online.
There's still plenty of room for growth ahead, especially as Target presses its advantage on quick delivery options like same-day fulfillment and pickup. Meanwhile, investors who buy the stock today aren't being asked to endure falling profits while the company pours cash into its delivery infrastructure, either. Sure, the retailer plans to continue its elevated pace of capital investments at least through 2020.
However, its operating margin is on track to rise in 2019, and that improvement could accelerate after early 2021 when CEO Brian Cornell and his team foresee scaling back on their five-year spending surge. In the meantime, shareholders should expect the usual volatility as the retail stock's sales growth ebbs and flows along with broader economic trends and competitors' moves.
McDonald's (NYSE:MCD) recently celebrated the 50th anniversary of its Big Mac sandwich, but don't let that long track record convince you that this is a slow-growth, fully mature company. On the contrary; investors today are seeing the type of improving operating and financial changes at the fast-food titan that they might expect from smaller, more nimble competitors.
For example, McDonald's profit margin shot up to over 40% of sales in 2018 compared to 33% just two years earlier. This win was due to its refranchising initiative that's quickly reduced the share of corporate-owned locations to below 5% from 15%. Mickey D's is also making aggressive changes to its growth strategy by pouring billions into modernizing its U.S. store base. At just under $2 billion of spending just over the last year, in fact, the remodeling program is easily the restaurant stock's boldest real estate bet to date.
CEO Steve Easterbrook and his team believe that the upgrades, which include adding things like digital menu screens, ordering kiosks, and online ordering and delivery functionality, will pay off by boosting sales growth and protecting market share. That scenario has already played out in other markets that have benefited from broad-based restaurant investments like France and Australia.
Investors are arguably seeing the early signs of firming growth in the U.S., given that sales accelerated in each of the last two quarters, culminating in a 5.7% spike in mid-2019. Executives credited value menu promotions for some of the gain, but also said their shift to never-frozen beef patties has helped support demand for products like the iconic Quarter Pounder.
The rebound hasn't yet returned McDonald's to rising customer traffic trends, and getting that metric back into positive territory is management's highest priority today. The successes the chain has had in international markets suggest that rebound might happen as quickly as late 2019. Yet investors tend to see robust returns from this highly efficient business even during periods of relatively sluggish growth.
6. Home Depot
Investors got a vivid demonstration of the cyclicality of the home improvement industry during the Great Recession in 2008-09. Home prices collapsed across the country, leading to reduced sales, depressed construction rates, and far lower volumes of home remodels and upgrades.
Home Depot (NYSE:HD) investors didn't escape that period without taking a few hits. The retailer paused hiking its annual dividend payment for three years as it saw earnings and operating margins each fall by almost 40%.
But its recovery path since that downturn has demonstrated a few attractive things about Home Depot's business. The retailer made adjustments that now make it the unquestioned leader in the home improvement space, having outgrown rival Lowe's in market share over the past decade. Yearly sales in 2018 crossed the $100 billion mark compared to $66 billion just 8 years earlier.
Management has found plenty of levers to pull for higher sales, too, including in the online sales channel and the professional contractor niche. Home Depot also boasts unusually strong financial metrics, with market-leading profitability and returns on invested capital.
It's impossible to predict when the next cyclical downturn will hit the industry, and CEO Craig Menear and his team have cited helpful fundamentals like demographics and the age of housing stock to argue that the latest expansion phase has room to continue for years.
But even if an economic slump is on the way, long-term investors have developed a lot of confidence from having seen the retailer navigate through an unusually tough sales period and emerge far stronger just a few years later. That kind of resilience is exactly what separates top consumer discretionary stocks from the rest of the pack, and it means Home Depot deserves a spot on your watch list.
Get in the game
A major drawback to the consumer discretionary investing niche is that it is heavily exposed to economic downturns. But while investors can't eliminate this risk, they can minimize it by focusing on companies that show off the flexibility and financial strength needed to thrive through a wide range of selling conditions. That's why the five stocks mentioned above represent a good starting point for your research as you look to add more top stocks to your portfolio.