Holiday Stocks: Making A List and Checking it Twice
It may seem a bit early to some, but it is time for investors to make their holiday shopping lists. I make no excuses for writing a holiday themed piece on December 8. In fact, I think it shows remarkable restraint, given that when it comes to trading and investing, one is supposed to be looking ahead, so there is an excuse for early mentions of the holidays. And what constitutes “early” is changing every year.
A friend of mine in England plays a fun game at around this time every year: He records on social media the first time and then the number of times he is "Whammed," or subject to the 80s pop duo Wham’s Last Christmas in a public setting. The first Whamming of the season has gotten progressively earlier over the years as the holiday season has started earlier and earlier. I got Whammed for the first time this year yesterday in a CVS, so it is time for some holiday-themed stock picks.
With the holidays in mind, where should investors’ lists be focused? Or given the view that we are rolling towards a recession, should we avoid anything that might benefit from a dose of holiday cheer?
In general terms, because of that pessimism, this might be one of the best years to invest with a holiday theme. Stock indices are off their highs by around 25%, the kind of drop that usually accompanies, not precedes, a recession. However, if consumers feel the pinch and cut back significantly, retailers, manufacturers, and any companies that benefit from consumer spending, will see weakness in the all-important Q4. Based on the evidence so far, that looks unlikely. One of the things that has been most baffling to many analysts has been that even as the economic storm clouds have been gathering, consumers have been resilient.
As food and fuel costs have soared, they have maintained spending on other things. That has tended towards experiences to this point, but during the holidays, that willingness to spend should translate into buying things for others. If recent trends continue, that will mean increased spending on online purchases.
The obvious beneficiary there is Amazon (AMZN), and that stock will be on a lot of people’s holiday shopping lists. I like Amazon from a long-term perspective, but in the current environment, I’m not sure it is the best way to play the holiday theme. The market seems set on repositioning the stock, along with other growth names, bringing high multiples back closer to the average. If that is the case, then AMZN’s P/E of 85 could still have downside room, meaning that a better-than-expected holiday season would result in a lower multiple rather than a higher stock price.
I would rather look for names that are already at low multiples, where any upside surprise in consumer activity will be more likely to result in a serious pop for the stock. The luxury home goods company Williams Sonoma (WSM), for example, which is brick-and-mortar based but has a decent online presence, is trading at a P/E below 7, as opposed to around 15 a year ago, based on some gloomy outlooks for Q4. That reflects the aforementioned pessimism around the level of consumer holiday spending, but if consumer resilience is a theme this year, as I expect it to be, then high end kitchen gadgetry will do well given the post-covid boom in home cooking and baking.
Similarly, logistics companies like both FedEx (FDX) and UPS (UPS), with P/Es of 12.7 and 13.7, respectively, are priced on the assumption that it will be a weak holiday season. However, if it is not, that combined with falling gas prices could lead to significant upside surprises, both in terms of revenue and margins. Both stocks could well be significantly higher in a month or so as that plays out.
If I am looking for a short-term play on the holidays for the next month or so, WSM, FDX, and UPS would be my picks. I did consider others, such as payment processors like Visa (V), Mastercard (MA) and Global Payments (GPN), but the “checking it twice” part of the process resulted in them dropping off the list as they all had above-average P/Es. That is the point here; not just to look for holiday themed stocks, but for holiday themed stocks with value and potential. WSM, FDX, and UPS check all the boxes.
* In addition to contributing here, Martin Tillier works as Head of Research at the crypto platform SmartFI.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.