Although the late-April and early-May rally has now erased the tariff-induced market sell-off, it’s important not to lose sight of sector performance during that sell-off.
In fact, identifying areas of outperformance during periods of extreme market weakness can offer valuable insight into where smart money is bidding up undervalued stocks and sectors.
A conspicuous show of relative strength typically denotes informed buying. That is, it suggests the presence of serious buyers who are presumably immune to the panicked impulses of the average investor during a sell-off.
These are buyers who take advantage of an unstable broad market to pick up fundamentally attractive stocks that were dumped by smaller investors who need to raise cash in a hurry.
Informed buying, as it’s often phrased, isn’t difficult to spot during a market panic since it almost always manifests as a stock chart that makes a higher low—or even vigorously rallies—while most stocks are making lower lows while being dumped.
Moreover, it requires substantial funds to cause a higher low to be made in an actively traded stock when the broad market trend is down, making it a telltale sign of activity by hedge funds or other deep-pocketed buyers.
With this in mind, let’s drill down and examine in closer detail the relative strength that was recently evident in two sectors that caught my eye during the latest bout of weakness: Consumer Staples and Communication Services.
2 Undervalued Sectors Showing Signs of Informed Buying
The two sub-groups within each of these industries that appear to be showing most of the strength are: Electronic Gaming and Multimedia (within Communication Services) and Grocery and Discount Stores (within Consumer Staples). The assumption here is that the relative strength within these industries is likely to persist in the coming weeks—assuming the market recovery gains traction—due to the strength of the buying behind these stocks.
Communication Services–Electronic Gaming and Multimedia:
Take-Two Interactive (TTWO)
Among the Electronic Gaming and Multimedia category, one of the standout performers during the recent market correction was Take-Two Interactive (TTWO), and for good reason: Video gaming is more than just a popular pastime for countless millions; indeed, by some estimates the global number of gamers is approaching a whopping three billion (or 33% of the world’s population!).
Enter Take-Two Interactive: the leading video game publisher offers top-selling titles through its Rockstar Games and 2K labels, as well as a new internal studio label, Intercept Games, and its industry-leading portfolio includes the Grand Theft Auto (GTA), Red Dead Redemption, Civilization and Borderlands series. But one of the firm’s most valuable games right now is NBA 2K, which is a big part of Take-Two’s entrance into the esports arena.
With several of Take-Two’s top-performing video game series scheduled to have new releases later this year, it should be no surprise that management said it sees 2025 “shaping up to be one of the strongest ever for Take-Two” while further guiding for record net bookings in fiscal 2026 and 2027. Analysts, meanwhile, expect the top line to boom almost 50% in fiscal 2026 on the strength of the diversifying game pipeline.
Consumer Staples–Grocery and Discount Stores:
Dollar General (DG)
Meanwhile, on the Grocery and Discount Stores front, Dollar General (DG) has lately shown signs of relative strength during a time when most stocks were trampled underfoot. And it’s not hard to fathom why: In the present inflationary environment—and with recession fears mounting—the store’s price points are attractive for cost-conscious shoppers.
What’s more, unlike many of its retail sales competitors, Dollar General is well positioned to thrive in the current tariff regime. The company operates 20,000 stores across North America and is one of the largest discount retailers in the U.S., with more than 80% of its sales coming from essential household items (including food) that can be considered to be relatively recession-proof.
And as the store sources most of its goods domestically and its sales items are focused on non-discretionary consumer staples, the tariffs are adversely impacting the firm’s competitors that heavily rely on imports more so than Dollar General. This should consequently allow the firm to expand its market share and improve its competitive positioning going forward at the expense of its competition. On that score, Wall Street sees several years of 10% to 15% bottom-line growth ahead for the firm.
In view of the relative strength exhibited by each of these stocks, as well as the big-picture story behind both of them, I can see both continuing to perform well in the coming months (assuming there are no additional market shocks).
