Top Consumer Discretionary Stocks for May 2023

Top stocks in the consumer discretionary sector for May 2023 include Luckin Coffee Inc., MINISO Group Holding Ltd., and Melco Resorts & Entertainment Ltd., all Chinese companies whose stocks have soared following the end of the nation's zero-COVID policy.

While the stocks above have all at least doubled in the last year, consumer discretionary stocks as a group, as represented by the Consumer Discretionary Select Sector SPDR Fund (XLY), have fallen 2%. The Russell 1000 Index, a broad measure of U.S. large-cap stocks, has climbed 4% during the same period.

Below are the top consumer discretionary stocks for this month, classified by best value, fastest growth, and most momentum. Benchmark data above are as of May 10, while all figures below are as of May 8.

Best Value Consumer Discretionary Stocks

These are the consumer discretionary stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows that you're paying less for each dollar of profit generated. But they also could turn out to be a classic case of a value trap.

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• Light & Wonder Inc.: Light & Wonder, formerly known as Scientific Games Corporation, designs gaming content for casinos and related businesses. The company recently repaid $4.8 billion in debt, reducing its outstanding debt by 55%. Quarterly earnings have shrunk significantly since the company's divestiture of its sports betting and lottery business in the second and third quarters of 2022.
• Stellantis NV: Stellantis is a Dutch automotive manufacturer formed by the 2021 merger of Fiat Chrysler and Peugeot. The company, whose brands include Jeep, Dodge, Chrysler, Fiat, Alfa Romeo, and Citroën. also operates insurance and publishing businesses. Net income grew almost 20% in 2022 on strength in North American, South American, and European businesses. Revenue climbed by 14% for the first quarter of 2023 on higher shipments and favorable net pricing.
• Beazer Homes USA Inc.: Beazer designs and builds residential homes, primarily in the southern U.S. After falling 60% from its 2021 highs, Beazer has joined other homebuilders in a relief rally, rising about two-thirds since last Fall.

Fastest-Growing Consumer Discretionary Stocks

These are the top consumer discretionary stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly year-over-year (YOY) percentage revenue growth and most recent quarterly YOY earnings-per-share (EPS) growth.

Both sales and earnings are critical factors in the success of a company. Therefore, ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one figure or the other unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of more than 1,000% were excluded as outliers.

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• PENN Entertainment Inc.: PENN provides entertainment, sports content, and casino gaming services. It operates 43 properties across the country as well as online sports services. Net income surged for the first quarter of 2023 due primarily to its acquisition of Barstool Sports and reclassification and remeasurement of lease components.
• Sleep Number Corp.: Sleep Number is a wellness technology company that makes digitally enhanced smart beds. Net sales remained flat for the most recent quarter, while operating income improved both as a result of gross profit gains and a reduction in operating expenses.
• EVgo Inc.: EVgo is a maker of electric vehicle charging station equipment and infrastructure with charging stations in 30 states. Revenue more than tripled year-over-year in the first quarter of 2023. The company doesn't have an EPS growth figure because it reported a net loss in the latest quarter.

Consumer Discretionary Stocks With the Most Momentum

These are the consumer discretionary stocks that had the highest total return over the past 12 months.

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• Luckin Coffee Inc.: Luckin is a Chinese holding company that operates a coffee retail business. The company operates primarily through mobile apps and pick-up stores, selling fresh-brewed drinks, juices, and light meals. Luckin opened 1,137 stores in the first quarter, bringing total locations to 9,351. Revenue increased almost 85% from the same quarter a year ago. Luckin's growth has helped its stock price recover after plummeting 97% in the first half of 2020 as the company dealt with COVID-19 lockdowns and an accounting scandal for which it paid the SEC a $180 million settlement in December 2020.
• MINISO Group Holding: MINISO is a Chinese global household goods store. It specializes in low-cost products targeted to a younger demographic. MINISO is currently expanding its footprint worldwide, adding 238 international stores and 56 Chinese stores in 2022 to end the year with a total of 5,440 locations. While the Chinese market experienced a 27% drop in revenue last year due to COVID restrictions, revenue at overseas MINISO stores increased more than 38% year over year.
• Melco Resorts & Entertainment Ltd.: Melco is a Hong Kong-based developer and operator of resort properties in Asia and Europe. It has a primary focus on properties in Macau. Melco's first quarter 2023 revenue of $716.5 million represents an improvement of about 51% over the prior-year quarter, driven by the relaxation of COVID restrictions in Macau.

Advantages of Consumer Discretionary Stocks

Growing Economy: Consumer discretionary stocks capitalize on a healthy economy. Consumers with higher discretionary income are more likely to purchase "wants," such as new designer clothes, the latest electronic gadgets, or a long-awaited family vacation. Generally, the group performs well when consumer confidence is high and shoppers feel secure about their employment situation and financial position. Investors can track consumer sentiment by following the Consumer Confidence Index (CCI)—a survey administered by The Conference Board that measures how optimistic or pessimistic consumers are regarding their expected financial situation.

Brand: Many consumer discretionary stocks benefit from strong brand recognition, helping drive revenue and create market share. Moreover, companies that build brand loyalty can enter new product areas, or even new industries, taking their existing customers with them. For example, Amazon.com, Inc. (AMZN) started as an online marketplace for books, but through increased brand awareness, it grew into an e-commerce giant and is now a global conglomerate involved in everything from digital streaming to logistics.

Risks of Consumer Discretionary Stocks

Slowing Economy: Just as consumer discretionary stocks perform well during periods of economic expansion, they struggle in downturns and recessions when consumers rein in their spending on discretionary products and services.

Supply Chain Disruptions: Consumer discretionary companies face challenges from snarls in supply chains. For instance, during the COVID-19 pandemic, many companies in the sector faced months of disruptions from border closures, shipping delays, and cargo backlogs. These issues can increase costs. Companies can try to pass those expenses on to consumers, but there's no guarantee they'll accept price increases.

Inflation: Rising prices can deter potential customers from purchasing discretionary items, particularly if consumer confidence starts to fall. Many economists have forecast a recession for the U.S. economy in 2023 after inflation hit a 40-year high in June 2022. Additionally, price hikes in other areas of the economy can have a contagion effect on consumer discretionary stocks. For example, a rise in airline tickets due to higher fuel costs can weaken demand for hotels.