Consumer discretionary stocks were skyrocketing in 2018 until the December market correction. However, some consumer companies have recovered nicely in 2019. With consumer spending in full swing so far in 2019, consumer discretionary stocks are in a position to benefit. Consumer discretionary goods and services are those non-essential items that consumers purchase if they have enough extra income.
Understanding Consumer Discretionary Stocks
Consumer spending is responsible for approximately 65% of the growth in the U.S. economy. Although economic growth is expected to slow in the second half of 2019, the consumer continues to outperform. Economic growth is measured by gross domestic product (GDP), which includes the total output of all goods and services in the economy. In 1Q19, the U.S. saw 3.1% growth while the economy grew by 2% in 1Q19 as reported and shown in the graph by the Bureau of Economic Analysis or BEA.
The consumer has been the primary driver of growth in 2019 so far, since the trade war between the U.S. and China has slowed business investment. As a result, the U.S. will need the consumer to remain robust through year-end and deliver solid spending during the holiday shopping season.
In 2018, economic growth and low unemployment were prevalent leading to a robust market, which corrected lower harshly in December. Consumer discretionary stocks are plotted out, as shown in the chart below, via the exchange traded fund (ETF) called the Consumer Discretionary Select Sector SPDR Fund (XLY). We should note the following:
- XLY rose most of 2018 until the Q4 correction or selloff in the markets.
- From January 2018 to early September 2019, XLY was up by 22%.
- Most of the gains are from 2019. XLY was up 24% from January-to-September 2019.
- The gains demonstrate that the consumer rebounded from the correction of late 2018.
Of course, not all stocks in the consumer discretionary sector rose this year and prices are subject to change, given market conditions and volatility.
5 Top Consumer Discretionary Stocks for 2019
Listed below are five of the top names in the sector that have outperformed so far in 2019. The stocks were chosen based on their size and price gains for the year.
1. Chipotle Mexican Grill (CMG)
Stock price increase: 90%
Market capitalization: $23 billion
Up until last year, Chipotle could do no right. The beleaguered fast-casual eatery’s stock had been in a free fall since 2015 as a wave of bad news, from food safety concerns to a change in its CEO, followed the company. But the narrative has changed.
Chipotle bumped up its spending on marketing and conducted multiple promotional campaigns. It also increased menu prices resulting in higher profit margins and has shut a number of underperforming stores as part of a turnaround plan revealed.
As of 2Q19, net income or profit for the company grew 39% from the same period one year earlier. The company also increased its revenue by developing sales initiatives and opened 20 new restaurants. Also, Chipotle has continued its commitment to improving food safety standards.
2. Target Corp. (TGT)
Stock price increase: 63%
Market capitalization: $54 billion
Target Corporation operates merchandise and food discount stores throughout the U.S. through its Target and SuperTarget stores. Profits were up 15% in Q2 from a year earlier and revenue rose by over $600 million. Target might fall victim to the trade war, but so far, the company has shifted most of that burden onto its suppliers. The market is betting that the large retailer, with its ability to manage costs, might be able to weather a prolonged trade war going into next year.
3. Starbucks Corp. (SBUX)
Stock price increase: 54%
Market capitalization: $115 billion
Starbucks sells food and specialty coffee and operates across the globe, including the U.S. Europe, China, and the Middle east. Profits were up to $1.37 billion in Q2 from $852 million a year earlier while revenue rose by over $500 million.
4. Home Depot (HD)
Stock price increase: 32%
Market capitalization: $245 billion
Home Depot, Inc. sells home improvement products, building materials, home decor, as well as lawn and garden products. Revenue was up to $30.84 billion in Q2 from $30.46 billion a year earlier while profits were down slightly to $3.48 billion from $3.51 billion.
However, over the last few quarters, the company has averaged roughly $2.5 billion to $2.8 billion in profits. In other words, Q2 was still one of the company's best quarters.
5. McDonald's Corp. (MCD)
Stock price increase: 24%
Market capitalization: $165 billion
McDonald's Corp. operates franchises of McDonald's restaurants in the U.S. and internationally. Revenue was $5.34 billion in Q2, up from $5.35 billion a year earlier, while profits were up by $200 million to $1.52 billion.