Consumer discretionary stocks were skyrocketing this year until they weren’t.
A perfect storm of favorable events provided fuel for gains in the sector during the first nine months of this year. First, there was the economy which was firing on all cylinders. 2018 began with the country’s GDP at an all-time high. Unemployment rates reached historic lows. The Federal Reserve further spurred spending by keeping interest rates low for most of this year. This gave consumers the necessary incentive to spend more of their discretionary income. Investor enthusiasm for the sector contributed to a growing frothy market. By September, the S&P 500 Consumer Discretionary Index had jumped by 18% from its figures at the start of this year.
But, the good times did not last. A collapse in stock valuations for the sector accompanied November’s market crash. Investor gains, which had piled up with skyrocketing prices, turned to losses in the aftermath.
As of this writing, the S&P 500 Consumer Discretionary Index is down by 7.3% from the year’s beginning. Leading exchange-traded funds, which have baskets of consumer discretionary stocks, have also shed their gains from the market’s run up. For example, the Vanguard Consumer Discretionary ETF (VCR) is trading at $142.39, down 10% from the year’s start right now. Investors and traders are also bracing themselves for a cyclical downturn in 2019.
Despite the decline since September, there are still winners to be found in the sector. Here are five consumer discretionary stocks that have managed to outperform the rest this year. This list includes companies listed on NASDAQ and NYSE and only includes companies with market caps of $1 billion or greater and are listed on S&P 500.
1. Advance Auto Parts (AAP)
Stock Price Increase: 67.5%
Market Capitalization:$11.5 billion
2. Chipotle Mexican Grill (CMG)
Stock Price Increase: 63.1%
Market Capitalization: $10.7 billion
3. O’Reilly Automotive Inc. (ORLY)
Stock Price Increase: 47%
Market Capitalization: $26.2 billion
Advance Auto Parts
Old is certainly gold for Advance Auto Parts. A severe winter this year meant more vehicle wear and tear and, consequently, more business for the company. The Roanoke, Virginia–based company reported earnings growth of 32% from the same period last year in its latest quarterly report. This quarter was the strongest comparable sales growth for the company since 2010.
Advance took significant strides to expand its presence across multiple channels in 2018. For example, it announced a partnership with Walmart Inc. (WMT) to create an online specialty auto parts store. This should help it mitigate competition from e-commerce giant Amazon.com Inc.’s (AMZN), which is expected to enter the auto parts business. Advance expects the momentum to continue next year.
During its third quarter earnings call, CEO Tom Greco cited the increased GDP forecast for 2019 and the Federal Highway Administration’s expectation of a 1.8% increase in the number of miles driven as factors that will work in the company’s favors. The number of vehicles greater than seven years old is also expected to grow in 2019, which means an increase in customers for Advance because these vehicles will require repairs and servicing to function optimally.
Chipotle Mexican Grill
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 changed this year.
Chipotle bumped up its spending on marketing and conducted multiple promotional campaigns. It also increased menu prices resulting in higher profit margins and plans to shutter 65 underperforming stores as part of a turnaround plan revealed in June. But food safety continues to be a matter of concern at the chain.
In September, 647 people experienced symptoms similar to food poisoning after eating at a Chipotle restaurant in Ohio.
In 2019, the Colorado-based chain intends to continue closing non-performing stores and ramp up on its tech creds by expanding its digital ordering system to additional stores and focusing on cutting down delivery time through apps. Chipotle has also set aside $100 million to buy back its own shares. During the third quarter, it purchased $19 million worth of stock and the buybacks are expected to continue next year.
O’Reilly Auto Parts
It was a good year for auto parts stocks. While Advance was the top performer this year, O’Reilly auto parts was not far behind. It posted gains of 47% in its stock price, since the beginning of this year. The Missouri-based retailer had an enviable 42% and 58% share of professional and DIY customers at the end of 2017. The company missed analyst estimates for its revenues during the third quarter.
During the earnings call, it cautioned investors about the impact that rising oil prices and the current administration’s tariffs could have on its bottom line in the coming year. An increase in oil prices could reduce business from DIY enthusiasts, who will probably drive less to save on costs. Tariffs have had a minimal effect on O’Reilly’s business this year but Thomas McFall, the company’s CFO, said the list of components affected by duties of 10% or more is “more extensive”. He said the company would pass on those costs to customers as price increases. O’Reilly Automotive has maintained its margin guidance.
2018 was a remarkable year for Amazon, the world’s biggest online retailer. It became the second trillion-dollar company in the markets after Apple Inc. (AAPL) in September. Jeff Bezos, Amazon’s CEO, overtook Bill Gates to become the world’s richest man. The Seattle-based retailer’s stock is up by 42.2% from the start of this year. Apart from macro-economic forces that worked in its favor for its retail business, the company also posted strong growth figures for AWS-its cloud business with hefty profit margins. For example, the business posted growth rates of 49 percent and 46 percent during the second and third quarters this year. Amazon Prime memberships also jumped. More importantly, the average amount spent by Prime members shot up from $600 last June to $1,500 during the same period this year.
But the company’s growth figures decelerated during the third quarter this year as its revenue and fourth quarter results fell short of analyst expectations, resulting in a 10% plunge in its price within a single day.
Amazon has blamed “unfavorable impact” from foreign exchange without specifying a country and a shifting of revenue for Amazon Prime to the next quarter as reasons for its lower guidance for the coming quarter.
Under Armour is another turnaround story this year. 2017 saw the company shed 40.5% from its price under trying business circumstances. But it clawed back those losses and more this year with an increase of 37.3%. International sales played a major role in the turnaround even as the company continues to struggle in a crowded domestic market. As of this latest quarter, Under Armour derives 24% of its overall revenue from overseas. Kevin Plank, the company’s CEO, says the company is in the middle of a multiyear turnaround of its operations.
As part of that turnaround, Under Armour intends to continue closing down non-performing assets such as warehouses and retail stores to become lean. Still some say that the market is rewarding Under Armour for its turnaround efforts rather than pricing it accurately based on business fundamentals.
Analysts are also not completely convinced. “Although the assortment has some good individual pieces, the entire range is a hodge-podge with no clear focus or specialism,” stated Neil Saunders, managing director of Global Data Retail.