Consumer Discretionary Emerges Surprise Winner in Q3: 5 Picks

Wall Street has completed an impressive third quarter despite the worst September in nine years. The astonishing recovery of stock markets in the second quarter after the lockdown-imposed disastrous first quarter continued in the third quarter too. The Dow, the S&P 500 and the Nasdaq Composite surged 7.6%, 8.5% and […]

Wall Street has completed an impressive third quarter despite the worst September in nine years. The astonishing recovery of stock markets in the second quarter after the lockdown-imposed disastrous first quarter continued in the third quarter too. The Dow, the S&P 500 and the Nasdaq Composite surged 7.6%, 8.5% and 11%, respectively, last quarter.

Wall Street’s V-shaped recovery,  barring September, is primarily credited to the overwhelming performance of the technology sector, which compelled several financial experts to term this sector a new safe haven. However, a closer look at the third-quarter performance reveals that cyclical sectors like consumer discretionary, materials and industrials actually outperformed technology.

The consumer discretionary sector turned out the largest gainer last quarter with several stocks skyrocketing. At present, a handful of these are top-ranked Zacks stocks, promising more upside in the near future.

Solid Performance by Consumer Discretionary Sector

On Sep 2, the Consumer Discretionary Select Sector SPDR (XLY), one of the 11 sectors of the broad-market S&P 500 Index, recorded an all-time high of 154.14. In the third quarter, the consumer discretionary, materials and industrials sectors grew 15.1%, 12.9% and 12.1%, respectively, while the technology sector improved 11.7%. The S&P 500 Index gained just 8.5%. Year to date, consumer discretionary has rallied 18.7%, second only to the technology sector, which has soared 28.7%. The benchmark itself is up just 4.6%.

Importance of Surging Consumer Discretionary Stocks

The consumer discretionary sector comprises businesses that sell goods and services, which are considered non-essential by consumers. These are the products that consumers can avoid without any major consequences to their well-being. In fact, these goods are desirable only if the available income of an individual is sufficient to purchase them. This is in sharp contrast to consumer staples products that are absolutely necessary.

The growing trend of the cyclical stocks, especially consumer discretionary stocks, is likely to continue as large parts of the U.S. economy have started coming out of pandemic-led lockdowns. Since the lockdowns in March, the U.S. economy is operating at a sub-optimal level.

The U.S. economy will gradually return to the pre-pandemic level as more parts of it reopen. These positives will set gains in motion for stocks from cyclical sectors such as industrials, financials, materials and consumer discretionary aside from the technology sector. This will limit the stock market’s downside potential.

Our Top Picks

We have narrowed down our search to five consumer discretionary stocks with strong growth potential and robust earnings estimate revisions in the last 7 to 60 days. These stocks surged nearly 15% or more  in the third quarter. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in last quarter.

 

NIKE Inc. NKE is engaged in the business of designing, developing and marketing of athletic footwear, apparel, equipment and accessories, and services for men, women and children worldwide.

The company has an expected earnings growth rate of 73.8% for the current year (ending May 2021). The Zacks Consensus Estimate for the current year has improved 17.3% over the last 7 days. The stock price rallied 28% in the third quarter.

Guess’ Inc. GES designs, markets, distributes and licenses lifestyle collections of apparel and accessories for men, women and children. It operates through five segments: Americas Retail, Americas Wholesale, Europe, Asia, and Licensing.

Although, the company’s current-year (ending January 2021) expected earnings growth rate is negative, it has an estimated earnings growth of more than 100% for next year. The Zacks Consensus Estimate for the current-year and next year has improved 38.9% and 17.5%, respectively, in the last 30 days. The stock price jumped 20.2% in the third quarter.

La-Z-Boy Inc. LZB manufactures, markets, imports, exports, distributes and retails upholstery furniture products, accessories and casegoods furniture products in the United States, Canada, and internationally. It operates through the Upholstery, Casegoods and Retail segments.

The company has an expected earnings growth rate of 6.5% for the current year (ending April 2021). The Zacks Consensus Estimate for the current year has improved 67.9% over the last 60 days. The stock price climbed 16.9% in the third quarter.

Crocs Inc. CROX designs, develops, manufactures, markets, and distributes casual lifestyle footwear and accessories for men, women and children worldwide. It offers various footwear products, including clogs, sandals, flips and slides, shoes, and boots under the Crocs brand name.

The company has an expected earnings growth rate of 28.6% for the current year. The Zacks Consensus Estimate for the current year has improved 0.5% over the past 30 days. The stock price surged 16% in the third quarter.

Caleres Inc. CAL is engaged in the retail and wholesale of footwear in the United States, China, Canada, Guam and Italy. It operates through Famous Footwear and Brand Portfolio segments.

Although, the company’s current-year (ending January 2021) expected earnings growth rate is negative, it has an estimated earnings growth of more than 100% for the next year. The Zacks Consensus Estimate for the current year and next year has improved 1% and 7.1%, respectively, in the last 30 days. The stock price advanced 14.6% in the third quarter.

These Stocks Are Poised to Soar Past the Pandemic

The COVID-19 outbreak has shifted consumer behavior dramatically, and a handful of high-tech companies have stepped up to keep America running. Right now, investors in these companies have a shot at serious profits. For example, Zoom jumped 108.5% in less than 4 months while most other stocks were sinking.

Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.

See the 5 high-tech stocks now>>

Click to get this free report

NIKE, Inc. (NKE): Free Stock Analysis Report

Guess, Inc. (GES): Free Stock Analysis Report

LaZBoy Incorporated (LZB): Free Stock Analysis Report

Crocs, Inc. (CROX): Free Stock Analysis Report

Caleres, Inc. (CAL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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