Investors concerned about protecting their portfolios from the chaos of the U.S.-China trade war would be wise to keep an eye on longer-term growth trends. With that in mind, investors with a longer-term horizon should consider stocks poised to benefit from the $1.4 trillion millennial spending wave. As the cohort of individuals born between 1981 and 1996 reach their prime spending years, slated to comprise a quarter of all spending by 2020, five particular stocks are best positioned to outperform, according to a detailed Barron’s report.

5 Millennial Winners

  • Farfetch Ltd. (FTCH), online luxury platform
  • The Lovesac Company (LOVE), modular couch and "sactionals" seller
  • Zuora Inc. (ZUO), cloud-based subscriptions services provider
  • Nike Inc. (NKE); athletic apparel maker
  • The Home Depot Inc. (HD); home improvement retailer

Source: Barron’s

These include online luxury platform Farfetch Ltd. (FTCH), modular couch and "sactionals" seller The Lovesac Company (LOVE), cloud-based subscriptions service firm Zuora Inc. (ZUO), athletic apparel giant Nike Inc. (NKE) and home improvement company The Home Depot Inc. (HD).

Millennials Enter Prime Spending Years

These stocks are expected to thrive as the first wave of millennials turns 38, an age seen as ideal to support young families and invest in household formation. Meanwhile, the youngest group of millennials are now exiting college and graduate school and entering the job market as at a time of high employment and demand for young, tech-savvy workers is at an all-time high.

This is just the beginning of the millennial wave, notes Barron’s, as spending tends to rise with income as consumers reach their late 30s and 40s. According to eMarketer, millennial shoppers, poised to overtake baby boomers as the largest U.S. cohort, will account for nearly 25% of the $5.7 trillion in estimated U.S. retail sales in 2020. 

“Clearly, one would expect millennial spending to increase healthily over the next decade or so,” said Richard Fry, senior researcher with the Pew Research Center, to Barron's. This should help offset a decline in spending from baby boomers as they age into retirement and start living off of their savings. Gen Xers, now in their 40s and 50s, are a much smaller cohort, causing a consumption gap. According to data from the Census Bureau, spending typically tapers off when consumers reach their 50s, per Barron’s.

Pat Tschosik, an analyst with Ned Davis Research, a firm that studies demographic trends, says that the best way to play on this generational-driven consumption gap is to seek particular industries and companies with “niche demographic tailwinds.” He highlights companies that can best profit off millennial demand and are not weighed down by lower spending from boomers or Gen Xers.

There exist various exchange-traded funds that focus on this trend, including the Global X Millennials Thematic ETF (MILN), which holds about 80 stocks with a “high likelihood of benefiting from the rising spending power and unique preferences” of millennials. However, as Barron’s notes, a myriad of factors will impact performance, such as valuations, competition and earnings. Analysts identified five stocks that are slated to reap the benefits of millennial spending and are attractive for other reasons.

Subscription-Based Trend

As customers become accustomed to paying monthly fees for key “tech utilities” like Spotify, Netflix and other services, and enterprise software moves in the same direction, Barron’s likes one cloud-based company that helps handle back-office functions for subscriptions. Zuora lists customers including General Motors Co. (GM), AT&T Inc.'s (T) HBO Go, and Caterpillar Inc. (CAT). According to Zuora management, subscription-based revenue models are outpacing the average S&P 500 index company by 5 times, meaning that Zuora stock could grow 100% over five years.

Looking Ahead

While these five companies could win big on millennial spending, any broader economic downdraft could disproportionately weigh on growth stocks as investors turn to “safer” industries like consumer discretionary and defense. With fears of a U.S.-China trade war reinvigorated, some of these stocks could face a bumpy ride ahead.