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The consumer is strong right now. Consumer confidence is near a two-decade high. Spending is up big year-over-year. The economy is growing at its fastest pace in recent memory. And, now that the U.S. has reached trade agreements with Mexico and Canada, one of the biggest risks of the U.S. economy flatlining has been thrown out the window. That means it is time to load up on consumer discretionary stocks ahead of the 2018 holiday season.
All signs point to this holiday season being one for the record books. Now is the time to buy consumer discretionary stocks, ahead of that spending catalyst.
All consumer stocks ebb and flow with consumer spending. But, when consumer confidence is higher and spending is robust, that usually means consumers are spending more on the things they want , not the things they need . That is especially true when it comes to holiday gift shopping.
But, who will the biggest winners be? Let's take a deeper look at which consumer discretionary stocks could post the biggest gains over the next few months.
Consumer Discretionary Stocks to Buy: Amazon.com (AMZN)
The most obvious consumer discretionary stock to buy for a big end-of-year rally is Amazon.com (NASDAQ: AMZN ).
The logic here is pretty straight-forward. Amazon is the leading e-commerce retailer in the United States, with 50% market share. Retail sales should be up big this holiday season. Over the past several years, the share of holiday retail sales that's migrated online has increased dramatically. All signs point to this trend continuing this year. Robust retail holiday sales equal robust e-retail holiday sales, and that equals huge holiday sales numbers for Amazon.
Bears continue to pound on the table about valuation when it comes to AMZN stock. Yet, these shares defied valuation gravity as they passed $1,000 and more because the growth narrative continues to get bigger and stronger. So long as this remains true - and it should, given offline retail and e-pharmacy expansion plans - Amazon stock will head higher.
Overall, Amazon stock is a long-term winner with a sizable near-term catalyst. That makes this consumer stock a buy before the 2018 holiday season.
Consumer Discretionary Stocks to Buy: Walmart (WMT)
A strong U.S. consumer leads us to the other obvious consumer discretionary winner: Walmart (NYSE: WMT ).
As with Amazon, the logic supporting an end-of-year rally in WMT stock is pretty simple. Walmart is the world's largest retailer by a mile. This is especially true in the United States. As such, if the U.S consumer is broadly strong, then that strength will inevitably find its way into Walmart. This is already happening (Walmart just reported decade-best results last quarter), and will continue to happen so long as consumer confidence and strength remain sky-high.
As for valuation, Walmart stock seems fairly valued around $100. Now hovering just below $95, the stock seems slightly undervalued ahead of that potentially huge holiday catalyst. That huge boost could switch investor focus off of tariff-related headwinds, and towards consumer-related tailwinds. In such a scenario, WMT stock could rally to $100 and higher by the end of the year.
Overall, Walmart is an undervalued stable growth company with a potentially huge catalyst on the horizon. That makes WMT stock a buy ahead of that catalyst.
Consumer Discretionary Stocks to Buy: Foot Locker (FL)
A less obvious, but perhaps more compelling, way to play the consumer discretionary rally during holiday 2018 is Foot Locker (NYSE: FL ).
By now, pretty much everyone and their best friend is aware of the Nike (NYSE: NKE ) resurgence. After getting its butt kicked by Adidas (OTCMKTS: ADDYY ) for several years, Nike finally started to fight back last year. Now, the company is back to dominating the athletic apparel game, and thanks to new product and innovative marketing catalysts, Nike is set to have a record holiday season.
But, because everyone and their best friend knows this, Nike stock is already priced for record numbers. But, Foot Locker, which has a deep connection with Nike and gets most of its sales from Nike products, isn't priced for record numbers. At just 11X forward earnings, Foot Locker stock is actually priced for record numbers.
Assuming Nike maintains its brand momentum into the holiday season, Foot Locker stock could rally in a big way if holiday numbers blow expectations out of the water.
Consumer Discretionary Stocks to Buy: Activision (ATVI)
One consumer discretionary sector set for a big rally into the end of the year is video gaming, and one name in the sector that all investors should be watching is Activision (NASDAQ: ATVI ).
Activision stock is breaking out to new all-time highs after the company added eight new franchises to the Overwatch League and intro'd Call of Duty: Black Ops 4 beta to positive early reception. This rally will persist into year-end if Black Ops 4 delivers blowout holiday numbers and Overwatch excitement continues to build.
Both seem likely to happen given recent developments in the video game market. Plus, ATVI stock appears to be holding its long-term uptrend. That uptrend should persist for a lot longer considering the company's massive, yet-to-be-realized eSports tailwinds.
Overall, robust Call of Duty sales should power ATVI stock higher into the end of the year. This rally should last for a lot longer given the company's promising long-term growth potential in eSports.
Consumer Discretionary Stocks to Buy: Michael Kors (KORS)
As strange as it may seem, the reason to buy Michael Kors (NYSE: KORS ) is because this company is no longer just Michael Kors.
Michael Kors is transforming into a global high-end fashion conglomerate that comprises multiple iconic luxury fashion brands. Last year, the company shuffled out $1.2 billion to buy luxury shoe company Jimmy Choo. Last month, Michael Kors spent $2 billion on acquiring Versace.
Going forward, Michael Kors will be known as Capri Holdings, and Capri Holdings is a name worth owning for the long haul. The Michael Kors brand, like all fashion brands, was subject to fashion cycles. But, Capri has added necessary diversity to the portfolio by acquiring Jimmy Choo and Versace. Between those three brands, revenue and profits should be much more stable going forward. Also, the combined sales and earnings contributions of all three brands will be markedly higher, too.
Overall, KORS stock is a buy here because the company is transforming into a global high-end fashion conglomerate with more stability and bigger profits. Enhanced stability and profitability will provide a double tailwind for the shares.
Consumer Discretionary Stocks to Buy: L Brands (LB)
Sometimes, the best stocks to buy are the ones that have been beaten up so badly that any positive news could spark a big rally. Such is the case with L Brands (NYSE: LB ).
L Brands is the parent company behind Victoria's Secret and Bath & Body Works. Both companies were considered secular winners a few years back. But Victoria's Secret has struggled recently amid rising competition. These struggles have refused to ease, and as such, LB stock has fallen off a cliff over the past three years.
But, Bath & Body Works continues to put up impressive numbers. And, Victoria's Secret isn't doomed forever. It's still the brand in sexy intimates. While the sexy intimates segment is losing share to the natural intimates segment, it is highly likely that these share losses eventually stabilize. As such, it is only a matter of time before Victoria's Secret stabilizes, and when it does, LB stock could rock higher. Given this holiday season projects to remain a robust one everywhere, the next few months seem like as good a time as any for Victoria's Secret to start stabilizing.
Overall, LB stock is a buy here because the company is behind two iconic brands with enduring value. One of those brands is struggling right now, but those struggles could reverse course this holiday season, and LB stock could rally in a meaningful way.
Consumer Discretionary Stocks to Buy: McDonald's (MCD)
Consumers gotta eat. Which means that the consumer rally isn't constrained to just shopping on apparel and merchandise items. It extends to restaurant spend, too, and that is why McDonald's (NYSE: MCD ) is a buy here.
Retail sales are up 6% year-over-year over the past three months. That is a big gain. But, it is small relative to the restaurant sector's gain. Over the past three months, restaurant spend in the U.S. is up nearly 10% . That is a huge gain, and it means restaurant stocks are set to report big numbers this quarter and likely next quarter, too.
The best pick in this sector is MCD stock. This company has always dominated where it matters most: price and convenience. Recently, though, the company has reinvented their menu to be more health-conscious (fresh patties), while maintaining low prices (2-for-$5 promotion) and unparalleled convenience (who doesn't love all-day breakfast?). Through these initiatives, McDonald's is dominating the fast casual market. Thus, any big bumps in restaurant sales will inevitably translate into a bump in sales.
Overall, MCD stock is a buy here because the company is expanding its dominance in a red-hot restaurant sector.
As of this writing, Luke Lango was long AMZN, WMT, FL, ATVI, KORS, LB, and MCD.
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