In yesterday’s edition, we saw that only two sectors beat the S&P 500’s return of 4.6% last week.
Those were the technology and consumer discretionary sectors, which are where all seven of the “Magnificent Seven” stocks live.
I explained how indexes like the S&P 500 and Nasdaq 100 hold the Mag-7 stocks in weights that far exceed most other stocks in the sector. This means these seven stocks have a lot of sway, but it doesn’t mean they’re the best place for your money — for that, we need to check my Green Zone Power Rating system.
Today, we’ll have a closer look at the 25 consumer discretionary stocks in the S&P 500…
- I’ll “X-Ray” the sector, letting you know how many of its components are currently rated “Bullish,” “Neutral,” or “Bearish.” You’ll see this analysis in the pie chart below.
- I’ll show you which Green Zone Power Rating factors the sector’s stocks rate well or poorly on. Specifically, we’ll be looking at Momentum, Value, Quality and Growth.
- I’ll point you toward valuable opportunities and point out pitfalls you should do your best to avoid.
Let’s dig in!
Consumer Stocks Down, But Not Out?
Step #1 in assessing a sector’s strength is done simply by noting the general direction of its trend — is it “up” or “down”?
Here, I’ll note that the consumer discretionary sector is in a medium-term downtrend after falling 26% from its mid-December peak.
And 18 of the sector’s 25 S&P 500 stocks are still down more than 20%, with a handful (including TSLA) down 40% to 50%.
Step #2 involves judging the individual stocks within the sector, which is generally called “breadth” analysis. Most of the time, if a majority of individual stocks within a sector are sending a “bullish” message, a bullish trend in the sector’s market prices can be trusted.
Otherwise, if we see a “bearish” message in the breadth data, we’ll need to examine which individual factors are contributing to it. It could be a sign of further trouble ahead or a buying opportunity… it all depends.
First, though, let’s “X-ray” the sector’s 25 stocks using my system’s Overall rating, which can broadly be categorized into one of three buckets:
- Bullish (rated 60 – 100).
- Neutral (rated 40 – 60).
- Bearish (rated 0 – 40).
Have a look…
Key Insights:
- 28% of S&P 500 stocks in the sector rate “bullish” in my system.
- 72% rate “neutral” or worse.
Right off the bat, these numbers tell us caution is warranted. That said, we already know the sector has sold off (along with the rest of the market) … so the real question is, where can we find good value?
Buy the Dip … If the Value is There
To see where the trouble and opportunity are, we’ll drill down into five of my system’s individual factors (note: the sixth factor, “size,” is irrelevant here as the S&P 500 is a large-cap index and thus, all of its component stocks rate poorly on “size”).
We’re simply asking: “How many S&P 500 consumer discretionary stocks rate ‘Bullish’ (60 – 100) on Momentum, Volatility, Value, Quality and Growth?”
This analysis gives us a feel for the dominant characteristics of the sector’s component stocks at the moment.
Listed in order, from the factor with the most “bullish” stocks down to the factor with the least number of bullish stocks, here’s how the sector shapes up today:
This is actually an encouraging breakdown…
As I see it, we have … predominantly quality businesses (22/25 = bullish on quality), some of which are still showing strong growth (12/25 = bullish on growth) … some of which may actually be good bargains (9/25 = bullish on value).
Meanwhile, the sector has very few stocks that rate well on Momentum or Volatility — which is precisely what we’d expect to see after a multiweek sell-off like we’ve seen since mid-February.
Putting it all together, we can see that the entire sector has sold off … but there are now three stocks that rate favorably on quality, growth and value — an ideal combination!
Those three stocks are:
With Ralph Lauren (RL), you’re getting a lower value rating but a higher overall score…
With the two homebuilders (DHI, PHM), you’re getting an overall rating that’s just barely into the bullish zone, but with “strong bullish” value ratings in the mid- to upper 80s.
Otherwise, Tesla (TSLA) is noticeably absent from this short list of stocks with favorable quality, growth and value ratings.
Get this…
TSLA rates third from the bottom among the 25 consumer discretionary stocks in the S&P 500, with a “bearish” overall rating of 24 out of 100.
It also rates lower than every other Mag-7 stock on growth … on quality … on value … and overall.
All told, TSLA is the second-largest holding in the SPDR Consumer Discretionary ETF (XLY) with a 16.2% weight … but it’s far from the best place for your money if you’re committed to buying quality companies at reasonable valuations.
If I were you … I’d have a closer look at RL, DHI or PHM instead!
To good profits,
Editor, What My System Says Today
P.S. If you’d like to find out which consumer discretionary stocks are in the Green Zone Fortunes portfolio, as well as gain full access to my Green Zone Power Rating system, click here to see how you can join now!