Recent U.S. government data revealed a remarkable trend: consumer spending is strong despite high prices, inflation, and negative consumer sentiment. September's data on personal spending and outlay showed that high prices do not faze consumers. Consumers are still willing to spend on air travel, restaurant meals, hotel stays, and other expenditures, which indicate a pent-up demand from investors after an extended economic downturn due to the pandemic. This boosted consumer discretionary stocks as a potential sector play in the short term.
While this may be the case now, experts still caution that overreliance on credit can mean trouble in paradise for consumers in the near future. That is sound advice, but it doesn't mean we can’t take advantage of the short-term potential of consumer discretionary stocks boost in sales and demand. In our view, these are three of the best consumer discretionary stocks worth looking at right now.
Deckers Outdoor Corporation (DECK)
Deckers Outdoor Corporation is an everyday and high-performance activity footwear and apparel company. The company offers premium footwear, accessories, and apparel via its UGG brand. It also provides outdoor lifestyle brand and trail products with Teva and running, hiking, and fitness products under HOKA. Its casual lifestyle and sandals brands are offered under Sanuk. Deckers has constantly been growing its brands, and its flagship brands UGG and HOKA® have been leading the charge in the company’s growth.
The company reported a record revenue of $1.092 billion, a 25% YoY increase from its last fiscal year. Its diluted EPS also grew 79% at $6.82 per share and beat analyst EPS estimates by 54.65%. As a result, DECK raised its revenue guidance for FY 2024 to $4.025 billion and diluted EPS to the $22.90-$23.25 range. Its HOKA® and UGG brands were the most significant contributors to its performance. Strong brand recognition and an impressive financial showing have made DECK one of our top choices for consumer discretionary companies to buy.
Analyst Ratings
Analysts rate DECK as a “Strong Buy” based on 11 Strong Buys, 1 Moderate Buy, and 2 Hold recommendations. The mean target price for DECK is $604.93, and the high target price is $720.00, an upside of 23.17%.
Lear Corporation (LEA)
Lear Corporation is an electrical distribution and automotive seating manufacturer. The company develops and manufactures seat subsystems, complete seat systems, and key components under its seating segments. LEA also manufactures connection and electrical distribution and electronic systems under its E-Systems segment, and also offers cybersecurity software, autonomous driving applications, and advanced vehicle positioning systems. Lear Corporation also supplies technologies for automated testing equipment in the production of automotive seats and is currently working on cloud and mobile-based software to enhance its product offerings.
The company’s recent financial reports show increased revenue by 10% YoY, while net income increased by 17.48% QoQ. LEA also beat analyst EPS estimates by 12.99% and grew adjusted EPS by 23.18%. The company has received many accolades that have helped push its brand further. This includes being a 2023 PACE award finalist for its ReNewKnitTM, which is a fully recyclable suede seating surface material, and receiving nine total J.D. Power 2023 U.S. Seat Quality and Satisfaction StudySM awards in total. Lear’s notable performance and recognition make it another top contender in our consumer discretionary buy list.
Analyst Ratings
Analysts rate LEA as a “Moderate Buy” based on 7 Strong Buys and 6 Holds. The mean estimate for Lear is $166.00, and the high target is $220.00, an upside of 71.65%. The company has also received an upgrade from one of the analysts covering LEA, moving from a Hold to a Strong Buy.
McDonald's Corporation (MCD)
McDonald's Corporation is one of the most recognizable brands in the world. It is a global and industry leader in the fast-food restaurant business. Some of its most recognizable products are its Big Mac, Chicken McNuggets, and World Famous Fries. The company has been a favorite of long-term and income investors due to its robust business model and consistent dividends. The company is currently a part of the elite “Dividend Kings” list of companies that have consecutively raised their dividends for over 50 years—an astonishing feat.
MCD finished the third quarter with a strong 11% growth in global sales across different segments and consolidated operating income also increased by 16%. The company also announced a 10% quarterly dividend increase, further adding shareholder value. However, even though third-quarter sales for a boost from its price hikes in the U.S., MCD noted a drop in customer visits. In response, McDonald’s aims to focus on value meals and deals - which reminds me of their “recession-proof menu” during the 2008/9 financial crisis. Regardless, the fast-food giant is a must-have for long-term investors looking for exposure in the consumer discretionary market.
Analyst Rating
Analysts rate MCD as a “Strong Buy” based on 19 Strong Buys, 3 Moderate Buys, and 7 Holds. The mean target for MCD is $313.46, and the high target price is $383.00, an upside of 47.22%.
Final Thoughts
Strong consumer spending is one of the signs of potential economic growth. With the recent reports showing consumer resiliency despite the economic conditions, this might be the best time for investors to check out consumer discretionary stocks. However, always do your due diligence to filter out the ones with real potential.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
