As I wrote yesterday, consumer discretionary shares have really been taking a beating.
Of course, in a cap-weighted index, the largest companies have an outsized impact on sector performance. And it happens that Amazon (AMZN) and Tesla (TSLA) – two consumer discretionary companies with market capitalizations well over $1 trillion – have been struggling lately due to investor concerns over AI valuations.
Amazon and Tesla together make up 43% of the entire consumer discretionary sector.
So, what’s the story here?
Is this really a case of two wildly expensive AI stocks taking down the entire sector? Or is there more at play here?
And importantly, if we are seeing a real rotation out of the go-go AI names, could some of that capital find its way to high-quality consumer discretionary names flying under the radar?
Let’s do a deeper dive and find out.
Sector X-Ray of the Consumer Discretionary Sector
One thing immediately jumps off the page.
While Amazon and Tesla do indeed have an outsized impact on the sector, they aren’t the only companies struggling right now. Fully 19 of the consumer discretionary stocks rate as “Bearish” on my Green Zone Power Rating system, and another 20 rate as “Neutral.”
Only 10 currently qualify as “Bullish.”
Of course, the “good stuff” is always in the details. It’s good to know that a stock rates as “Bullish,” but it’s important to know what’s supporting the rating.
Quality and Growth
In the case of consumer discretionaries, quality is really the dominant factor. Fully 41 of the 49 stocks in the sector rate as “Bullish” on quality, meaning they score at least a 60 out of 100.
This intuitively makes sense because branding plays a major role. A strong brand is an intangible asset that allows a company to sell its products at a premium price, generating high profit margins. And because high-end retail can be economically sensitive, maintaining a strong balance sheet is important too.
The stocks in this sector also tend to rate well on growth, with 34 out of the 49 rating as “Bullish” on their growth factor.
Consumer discretionaries tend to “lose points” on their volatility and value factors, with only 14 and 13 stocks rated as “Bullish” on those factors.
So, what conclusions are we to draw from this?
To start, if you’re looking for cheap and defensive value stocks, this probably isn’t the sector for you.
But if you’re looking for quality companies – well-run, highly profitable businesses – then this is a great fishing pond for potential buys.
So, with all of that as background, I compiled a list of consumer discretionary stocks that rate exceptionally well on their quality factors – factor scores of at least 80 – and rate at least a neutral 50 on their overall Green Zone Power Rating.
We can make a couple quick observations from this list.
To start, we have a lot of homebuilders making the cut. Pulte Group (PHM), NVR (NVR) and DR Horton (DHI) all have quality scores of 99 or 100, and all rate as either “Bullish” overall or within rounding error of it.
You may want to consider putting these homebuilders on a watch list rather than buy them today, as all three have been trending sharply lower since September. Homebuilding can be a wildly cyclical business, and a little patience here would be prudent.
Another interesting takeaway here is the presence of “junk” stores like Ross Stores (ROST) and The TJX Companies (TJX), which operates the T.J. Maxx and Marshall’s chains, among others. These “off price” retail specialists offer brand-name merchandise at deeply discounted prices by sourcing excess stock and manufacturer overruns.
Both score exceptionally well on quality, and TJX rates as “Bullish” overall.
Shoppers flock to discount chains like T.J. Maxx or Ross when their budgets are tight. With inflation still stubbornly high and the labor market looking a little shaky, this is exactly the kind of environment these chains are made for. Both stocks have been trending higher for months.
Online auctioneer eBay (EBAY) may not be a “junk store,” per se, but it fits the general theme. Cash-strapped consumers can buy and sell used goods using eBay’s platform. eBay rates an 86 on quality and a “Bullish” 71 overall.
If you’re looking for a place to hide from volatility in AI stocks, some of these high-quality, counter-cyclical consumer stocks are a great place to start your research.
To good profits,
Editor, What My System Says Today