Industry analysts have been going back and forth between hard landing, no landing, and soft landing scenarios for months. But for every bearish fear of recession, some data point (like job market strength, lessening inflation, or new housing starts) pops up to show us that the U.S. consumer remains fairly resilient.
Unfortunately, consumer discretionary stocks have responded more to the recession fears than the resilient reality.
But earnings for consumer discretionary stocks are still healthy, with a 25% rise forecast for the sector this year, higher than the 18% average annual increases over the past three years.
And while interest has increased in the industry, the average P/E is 44.8x, quite a bit lower than the 3-year average of 67.2x.
I have seen no shortage of shoppers in stores, so that led me to think about whether or not there were any good buys in the industry.
I actually found 12 companies that looked interesting. But when I delved deeper, it was obvious that three of them commanded more attention.
I’ve summarized them below. Maybe one or more will pique your interest, too.
3 Retail Stocks with Momentum
Lowe’s Companies, Inc. (LOW)
Lowe’s has increased its dividend payments for almost 50 years. And the company recently hiked it again, by 5%. In its last quarter, Lowe’s beat analysts’ earnings forecast, posting $3.67 per share, a 5% rise. Although the company did cut its 2023 outlook, based on economic concerns. However, its revenue forecast dropped from $88 - $90 billion to $87 - $89 billion, not a radical difference.
The shares of Lowe’s have climbed more than 100% over the past five years, and I expect while they may take a bit of a hit if a recession happens, I’m interested in the long term, which I believe holds excellent prospects for the company.
Amazon.com, Inc. (AMZN)
Another company that has recently benefited from my spending splurge is Amazon. I ask you, is there anything you can’t find on its website? I’ve tried, time and again, to stump the company with esoteric purchases, such as skinny tape for my whiteboard (I didn’t even know it existed until I started searching on Amazon!), plastic garden flag rubber stoppers, and 12 different colored duct tape rolls! But never have I not found what I needed.
Of course, I’m not alone. Investors sent Amazon stock up 14% in May, but not due to esoteric purchases. Instead, the rise came as a result of Amazon’s continued work in artificial intelligence (AI), the “it girl” of 2023. In March, the company announced its own generative AI efforts and brought out a few new AI-powered devices in May.
And more recently, Amazon has been talking with wireless carriers Verizon Communications, T-Mobile U.S. Inc, AT&T, and Dish Network Corp about offering low-cost mobile services in the U.S. According to Bloomberg News, the monthly wireless plans for its Prime customers could be as little as $10/month. Sign me up!
McDonald’s Corporation (MCD)
I’ve talked about McDonald’s stock in my Cabot Money Club Magazine a few times. I first bought it for around $10 a share in my accounts for my nieces and nephew, when they were born. Too bad they sold it off before entering college!
Today, the shares are closing in on $300, and the company continues to set industry records. In March, its comparable-store sales growth—at 13%—walloped that of its competitors.
Its secret sauce is increasing customer traffic with rising average tickets.
In the past few years, the company changed its franchising strategy so that almost all of its stores are now franchises, with few company-owned stores left. That helped its bottom line, by shifting costs to its franchisees and generating more revenue from franchise sales on the top line.
McDonald’s profit margins are now more than 45%, a new record for the company.
Like it or not, fast food is not going away. It’s pretty much recession-proof.
|Price ($)||P/E||Analyst Rating||Div. Yield (%)|
|Lowe’s Companies, Inc. (LOW)||215.46||20.68||Strong Buy||2.03|
|Amazon.com, Inc. (AMZN)||125.78||306.78||Strong Buy||n/a|
|McDonald’s Corporation (MCD)||293.04||31.48||Buy||2.07|
While certainly, Amazon shares are trading at a lofty P/E, they pretty much always have. I would not count this company out, even at this price.