If you don’t watch TV, use the internet, or read newspapers or magazines, you may not be aware of this, but Black Friday is just one week away! Of course, that means that Thanksgiving is six days away, but if the advertising is to be believed, Black Friday is the big deal, not the quaint tradition of gathering with family and friends, eating dried out meat with sides that you wouldn’t serve on any other day. In fact, the sense of anticipation as Black Friday approaches is so intense that some companies don’t believe we can wait and are offering “Black Friday” deals already!
Misanthropy and sarcasm aside, though, the holiday season in America is an important one for many U.S. companies, and strength during this period can be crucial to cash flow in a way that can impact the next year significantly. Investors will be asking themselves if it will be a good holiday season, and if so, what should they be considering buying in preparation?
The overall outlook, like seemingly everything these days, is probably best described as “uncertain.” During the earnings season that is just ending, there have been several companies that have warned about a somewhat soft end to the year when it comes to consumers. Both Target and Walmart, for example, talked about some weakness in discretionary spending, and customers who were much more conscious of value than they have been recently. That would suggest cautious consumers who are starting to feel the pinch, but there are some analyses of the data, such as this from Bank of America (BAC), that point to continued resiliency from American households.
As I said, uncertain is probably the best description of the situation, but it is uncertainty about the future, and Americans typically put uncertainty aside when it comes to the holidays. They will cut back if things are really tight right now, but not because they might become tight at some point in the future. So, while there are plenty of reasons to worry about stocks as the year ends, it is reasonable to expect that a very weak holiday season isn’t one of them. That means that buying some likely beneficiaries of holiday spending now, before the news starts to trickle in.
The numbers suggest that consumers are still spending, but the anecdotal evidence indicates that they are becoming a bit more value conscious as they do, all of which sets up for a good holiday season for a particular type of retailer: value-driven big box stores. That brings in stocks like TJX Companies (TJX), the parent of stores like TJ Maxx, Marshall’s, and Home Goods, or maybe Kohls’s (KSS).
Within that overall cautious approach from consumers, there is one area where people are still spending at levels way above where they were before the pandemic: travel and experiences. The experience of the lockdown and restricted travel, combined with a less materialistic generation coming of age, has made that an area of the economy that has held up even as overall spending has moderated. These are not industries typically associated with big holiday spending, but travel, if only to be with family, is an important part of the season. Being the last thing people will cut back on, the industry will probably hold up well even if things do get a bit wobbly. Add in falling oil prices that will reduce costs, and airline stocks look like a decent way to play resilient holiday spending.
This is an American story, so I would look at primarily domestic carriers over international here. Two of the largest of those, JetBlue (JBLU) and Spirit (SAVE), are still pursuing a messy, much opposed merger, and news connected to that will dominate their stocks for a while to come, so they are not ideal here. The best of the rest are probably Southwest (LOVE) and Alaska Air Group (ALK). Both are bouncing back right now after huge drops over the last four months, so there is both value and upside in the stocks.
The third area where I would look is in the indirect beneficiaries of holiday spending. That brings in credit card companies like Visa (V), Mastercard (MA) and maybe Amex (AXP) and Capital One (COF), and logistics firms like FedEx (FDX) and UPS (UPS). I would favor the processors, Visa, and MasterCard, over issuers like Amex and Capital One, given that there is some economic risk going forward. Resilient consumers will use their cards for holiday spending, but whether they pay them off or not should next year prove tough is another matter.
The stocks of the two big logistics firms have been moving in opposite directions over the last few months. UPS has lost over 30% since the end of July, while FDX has actually gained during the same time frame, so which of those you prefer depends on your investing style. Normally, for me, it would be UPS, which has more obvious upside, but as I said the other day, now is not the time to be contrarian, so the better-performing FDX would be my choice at the moment.
The holiday season is usually a crucial time for the U.S. economy, and the focus on Black Friday rather than Thanksgiving in the pre-holiday advertising indicates that that will be as true as ever this year. Holiday-focused stocks may well provide some rare bright spots as we move into an uncertain new year, so even investors like me who are usually wary of seasonality should consider positioning themselves for the holidays to some extent. Happy holidays!
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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