Despite a recent sell-off impacting consumer discretionary and staples sectors, Wall Street analysts pinpoint key opportunities for investors. High interest rates, rising gas prices, and stagnant wage growth have pressured household spending, yet resilient companies like Home Depot, McDonald’s, Costco, Walmart, and TJX Companies are identified as promising buys.
Amidst a significant market correction for consumer stocks, two prominent Wall Street analysts are advising investors to seek out opportunities in resilient companies capable of enduring strained household budgets. Over the last three months, both the consumer staples and consumer discretionary sectors have lagged the broader market. Specifically, the State Street Consumer Staples Select Sector SPDR ETF (XLP) has dipped 4%, and the Consumer Discretionary ETF (XLY) has fallen 5%, while the S&P 500 recorded a 4.3% gain during the identical period.
This downturn has created potential buying opportunities among several well-known consumer brands. Notably, giants like Home Depot and McDonald's have seen their stock prices tumble 18% over the past three months. TJX Companies, the parent company of Marshall's and Homesense, is down 10%, while Walmart has declined 3%. Costco, however, has remained relatively stable.
Paul Hickey, co-founder of Bespoke Investment Group, attributes the sector's struggles to persistently high interest rates and escalating gas prices. These factors directly impact consumer spending through increased borrowing costs and energy expenses. Moreover, rising Treasury yields offer investors a more attractive, lower-risk alternative to equities. Hickey emphasized that a sustained upward trend in interest rates and oil prices will continue to challenge the sector's recovery, asserting that even established blue-chip consumer companies are not impervious to these pressures.
The economic headwinds are significant. The 10-year Treasury yield, a critical benchmark for mortgages and auto loans, soared by 52 basis points in the third quarter, reaching 5.29%. AAA reports that diesel prices have escalated by a staggering 68% since the onset of the Iran war, amplifying transportation and manufacturing expenses for businesses and exacerbating inflationary pressures. Hickey highlighted that lagging wage growth presents a "major headwind" for the sector. Data from the Bureau of Labor Statistics' latest report indicates that average hourly earnings grew by only 0.1% in September, resulting in a modest 3% annual gain over 12 months. Meanwhile, consumer prices in August (the most recent data) climbed at a 3.4% annual rate, meaning workers' purchasing power is failing to keep pace with inflation.
Joe Feldman, an analyst at Telsey Advisory Group, suggests that investors should focus on individual stock picks rather than broad sector investments. He advises that a substantial drop in the share price of high-quality companies often signals an opportune moment for re-evaluation.
Home Depot
Despite a challenging housing market characterized by limited supply and high mortgage rates, Home Depot has consistently delivered. Feldman notes the company has achieved seven consecutive quarters of comparable store growth, a trend expected to persist through the latter half of the year. The analyst lauded Home Depot's strong performance and market share gains, achieved "despite their traditional macro backdrop being under significant pressure."
McDonald's
McDonald's has actively sought to re-engage lower-income consumers this year. While acknowledging management's efforts to address a perceived decline in value, Feldman stated that the fast-food giant continues to deliver "pretty solid numbers" even as overall consumer spending moderates.
Costco
Costco is uniquely positioned to withstand a period of reduced consumer spending, largely due to its membership base comprising a higher-income demographic. Feldman described Costco's sales and earnings performance as "phenomenal" and highlighted its accumulating "cash pile." There's even speculation of a special dividend next year, a payout last seen in January 2024. The warehouse club's ability to offer cheaper gasoline at its stations has also drawn in cost-conscious consumers. However, its high stock multiple means Costco must consistently exceed elevated expectations.
Walmart
Despite a recent same-store sales miss, Feldman asserts that "Walmart's business is as good as it has been." The nation's largest brick-and-mortar retailer is "getting bigger" and stands out as a high-quality company boasting a robust balance sheet, skillfully managing its operations irrespective of the prevailing economic climate.
Looking beyond the immediate challenges, Bespoke's Hickey commented that both Walmart and Costco have a proven track record of navigating macroeconomic pressures across various business cycles, though the near future might present a "bumpier ride."
TJX Companies
The off-price retailer TJX Companies experienced a setback last quarter due to a "self-inflicted merchandising misstep" – a suboptimal inventory mix that negatively impacted certain business segments. However, management indicates that trends have since improved. In contrast, competitor Ross Stores has maintained consistent sales and earnings, leading to perceptions of market share capture from TJX. Nevertheless, TJX traditionally performs strongly during the holiday season, appealing to consumers searching for valuable deals.
