Wall Street's astonishing performance over the past five months has primarily been driven by a historic rally of the technology sector. However, a closer look into the new bull market reveals that aside from the technology sector, the consumer discretionary sector also provided tremendous support to the market's V-shaped recovery.
Robust Performance by Consumer Discretionary Sector
On Aug 25, 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 148.90. Year to date, the XLY is the second-best performer only after the Technology Select Sector SPDR (XLK). The XLY has gained 18.7% so far this year, while the XLK has rallied 30.4% and the benchmark itself is up only 6.6%.
In the past three months, the XLY, the XLK and the S&P 500 gained 22.8%, 23.9% and 16.5%, respectively. Likewise, in the past one month, the XLY, the XLK and the benchmark advanced 9.9%, 13.7% and 7.1%, respectively.
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.
Notably, the U.S. economy was performing well buoyed by strong consumer spending before the outbreak of coronavirus. However, the lockdowns imposed by the United States and across the world along with the breakdown of the global supply chain system, significantly dented both consumer and business confidence. At this juncture, an impressive showing by the consumer discretionary sector is noteworthy.
Momentum Likely to Continue
Despite the second wave of COVID-19 since mid-June, a series of important economic data for July and August are better-than-expected. This indicates that the U.S. economy will gradually return to the pre-pandemic level as more parts of it reopen. Moreover, as per data reported by John Hopkins University, it seems that new coronavirus cases have stabilized in the country.
Although second-quarter 2020 earnings results are disappointing compared with the same period last year, the overall results are better than expected so far. Finally, the earnings growth picture is steadily improving since the start of July for third-quarter, fourth-quarter and full-year 2020. In fact, there has been a notable improvement since the outbreak.
The pandemic is not behind us but the bull market is marching northward steadily on expectations of a systematic economic recovery. We believe that along with the technology sector the consumer discretionary sector will also hold its ground supported by the above-mentioned positives.
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 30 days. these stocks have surged more than 60% in the past three months. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (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 the past three months.
Lincoln Educational Services Corp. LINC provides various career-oriented, post-secondary education services to high school graduates and working adults in the United States. It operates through three segments: Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional.
The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has increased more than 100% over the last 30 days. The Zacks Rank #1 stock has jumped 126.2% in the past three months.
K12 Inc. LRN is a technology-based education company that provides proprietary and third-party online curriculum, software systems, and educational services to facilitate individualized learning for students primarily in kindergarten through 12th grade in the United States and internationally.
The company has an expected earnings growth rate of 73.3% for the current year (ending June 2021). The Zacks Consensus Estimate for the current year has increased 28.4% over the last 30 days. The Zacks Rank #1 stock has soared 79.1% in the past three months.
Hamilton Beach Brands Holding Co. HBB is a designer, marketer and distributor of branded electric household and specialty houseware appliances, as well as commercial products for restaurants, bars and hotels.
The company has an expected earnings growth rate of 20.2% for the current year. The Zacks Consensus Estimate for the current year has increased 4.8% over the last 30 days. The Zacks Rank #1 stock has surged 68.8% in the past three months.
YETI Holdings Inc. YETI designs, markets, retails and distributes products for the outdoor and recreation market under the YETI brand in the United States, Canada, Australia and Japan.
The company has an expected earnings growth rate of 15.8% for the current year. The Zacks Consensus Estimate for the current year has increased 33.7% over the last 30 days. The Zacks Rank #1 stock has appreciated 61.4% in the past three months.
Vista Outdoor Inc. VSTO designs, manufactures and markets consumer products for outdoor sports and recreation markets in the United States and internationally. It operates in two segments: Shooting Sports and Outdoor Products.
The company has an expected earnings growth rate of more than 100% for the current year (ending March 2021). The Zacks Consensus Estimate for the current year has increased more than 100% over the last 30 days. The Zacks Rank #2 stock has climbed 113.4% in the past three months.
Zacks’ Single Best Pick to Double
From thousands of stocks, 5 Zacks experts each picked their favorite to gain +100% or more in months to come. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
With users in 180 countries and soaring revenues, it’s set to thrive on remote working long after the pandemic ends. No wonder it recently offered a stunning $600 million stock buy-back plan.
The sky’s the limit for this emerging tech giant. And the earlier you get in, the greater your potential gain.
Click Here, See It Free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Lincoln Educational Services Corporation (LINC): Free Stock Analysis Report
Vista Outdoor Inc. (VSTO): Free Stock Analysis Report
K12 Inc (LRN): Free Stock Analysis Report
Hamilton Beach Brands Holding Company (HBB): Free Stock Analysis Report
YETI Holdings, Inc. (YETI): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.