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3 Consumer Stocks with Plenty of Upside Ahead

Consumer spending is the lifeblood of the US economy, making up some 70% of all economic activity in the States. So it’s of interest to note that the University of Michigan consumer sentiment index fell from December’s 98.3 to 90.7. This is the lowest level since October, 2016, and it’s a signal that may bode ill for the economy.

Unless...

Unless we zoom out a little, take a look at the larger picture, and put some context around the numbers. Stocks had a rollercoaster month in December – dropping sharply from the first week of the month until Christmas Eve, and starting a rally on Dec 26 that continues through today.

At the same time, the US Federal Reserve both raised interest rates for the fourth time of 2018 and indicated that it would pull back on monetary tightening in 2019. And if that wasn’t enough, the simmering trade tensions with China saw a sudden easing when President Trump announced that he and Chinese President Xi had agreed to a three-month delay in implementing new tariffs and would continue trade talks during that time.

And now remember that the economic surveys – especially the sentiment surveys – are frequently lagging indicators. They are useful tracking tools, but they usually track what happened, or how people felt, a few weeks ago. So, let’s use the TipRanks database to look at some consumer stocks – household goods, takeout food, and beer – and try and get a feel for how they are doing in real-time.

Dollar General Corporation (DGResearch Report)

Dollar General is an old name in the discount retail sector. As a dollar store, it offers a range of low-priced merchandise to a low-income clientele, and while prices have gone up since the chain started out, many items are still set at one dollar. DG is a niche retailer, and one well positioned to take advantage of tough economic times. What’s less visible, however, is that it is also able to take advantage of a rising economy – after all, everyone likes a deal, even when times are good.

This smart positioning lies behind DG’s solid Q3 earnings, reported last month. Revenues, at $6.42 billion, were up over $500 million from the year-ago quarter while the EPS was reported at $1.26, matching the forecasts.

Five-star analyst Rupesh Parikh (Track Record & Ratings) of Oppenheimer reiterated DG’s ‘Buy’ rating on January 10. In his most recent comments on the stock, he said, “We are maintaining DG’s top pick status… we still feel confident in the company’s ability to deliver industry-leading bottom-line growth next year within our food retailing/discounter universe.”

A few days earlier, KeyBanc’s Bradley Thomas (Track Record & Ratings) had upgraded his review of DG to ‘Overweight,’ suggesting that it will outperform the market, and set a price target of $125, for a 10% upside.

Overall, DG shares hold a ‘Strong Buy’ in the analyst consensus, based on 10 recent ‘buy’ ratings and 1 ‘hold.’ The average price target is $122, which suggests a 7.6% upside to the stock. The current share price is $113.

Domino’s Pizza, Inc. (DPZResearch Report)

Domino’s is enjoying something of a resurgence. This author remembers the chain as the cheap pizza of choice from his 1990’s college days, but Domino’s does not look back on that period quite so favorably, as the chain developed a reputation for poor quality. In 2010, management launched a complete revamping of the menu, ingredients, and recipes, and in the years since has succeeded in drastically improving their reputation. Sales success followed; in February of last year, Domino’s became the world’s largest pizza delivery chain in terms of total sales volume.

The company’s sustained and successful self-reinvention continues to the present. Earlier this month, Domino’s held an Investor Day, at which management discussed current conditions and future plans. In addition to investors, analysts also attended and came away impressed.

Stifel analyst Chris O’Cull (Track Record & Ratings) gave DPZ stock a $300 price target with a ‘Buy’ rating after hearing what company management had to say. The company’s upbeat approach left him confident in the stock’s growth potential going forward. He said, “Domino’s management outlined a vision to grow its system sales to $25 billion with 25,000 stores by 2025 through a strategy emphasizing order count increases and net unit growth.”

David Tarantino (Track Record & Ratings), of Baird, also came away from the conference with confidence in Domino’s ability to keep up its momentum. He stated his belief that “…total system sales growth can remain robust and support the stock's premium valuation.” He gave DPZ a price target of $295, for a 10% upside potential.

Overall, DPZ stock holds a ‘Strong Buy’ analyst consensus, based on 8 ‘buy’ ratings and 2 ‘holds.’ The average price target of $299 gives an 11% upside when compared to the share price of $267.

Constellation Brands, Inc. (STZResearch Report)

Really, isn’t beer the ultimate consumer product? Constellation Brands should know, as it’s the owner of Mexico’s famous Corona beer, as well as numerous other brands of beer, wine, and liquor. Going by US sales, Constellation has the third largest market share among beer companies and is the largest beer importer in the US.

The company had some tough times earlier this month, when stock prices lost more than 10%. The drop came after the company released some financial details of its recent acquisition of Canopy Growth (CGCResearch Report), the Canadian cannabis company. The acquisition offers a great deal of potential to Constellation; it gives the company a strong foothold to move into the emerging market for cannabis products. On the negative side, the deal cost Constellation $4 billion dollars, and debt service on that sum will shave up to 25 cents from its EPS in the next quarterly report.

The effect in the market was immediate: STZ slipped $22 per share, 12%, and has since only partially recovered the losses. At the same time, top analysts have reiterated their confidence in the company’s future growth potential. Five-star analyst Vivien Azer (Track Record & Ratings), writing from Cowen the day after Constellation revised its guidance, gives STZ a $220 price target and says that she “…remains positive on the company given its best-in-class beer portfolio, meaningful exposure to cannabis, and a strong shareholder return outlook for the next three years.” Her price target implies a 34% upside to the stock, significantly higher than the average.

Azer is not alone. Jefferies’ Kevin Grundy (Track Record & Ratings) takes an even more upbeat look. Considering the company’s guidance revisions, Grundy says, “The company confidently outlined the attractive growth story still ahead.” He added that, “STZ underscored its strategy to grow its base, successfully innovate at the high-end of the category, and capitalize on its total beverage alcohol position.” Grundy’s price target, $258, suggests a 57% upside to STZ.

STZ’s overall position is a ‘Moderate Buy,’ based on 10 recent ‘buy’ ratings and 6 ‘holds.’ The 25% upside, based on an average price target of $206, reflects the analysts’ optimism on the stock, and the company’s ability to turn current debts into future profits.

Author: Michael Marcus

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


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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