By Paul R. La Monica
Shoppers are showing no signs of fatigue ahead of the holidays. Even though inflation continues to crimp people's spending power, U.S. retail sales for September are expected to continue to pick up steam following a surprisingly strong gain in August.
The outlook for spending looks favorable given that the Federal Reserve has already cut interest rates once, reducing the cost of a variety of consumer loans. It is widely expected to keep lowering them for the remainder of this year and through at least the early part of 2025.
What is more, the labor market is still in solid shape. And as long as unemployment remains low and wages are growing, healthy spending should give retailers and makers of consumer products a boost. But which ones specifically? Experts say that investors should be discerning shoppers when it comes to consumer discretionary stocks.
"The consumer is holding up well, and incremental inflation pressures are easing. However, caution is still warranted regarding companies geared toward a mass or lower-end consumer that doesn't benefit from downtrading," said Emily Leveille, a portfolio co-manager of the Thornburg International Growth Fund, in a report.
She likes higher-end luxury-goods companies such as Ferrari and Brunello Cucinelli, as well as online retailers Shopify and MercadoLibre. The latter two are "winners in a structurally growing market with lots of levers to pull for growth and profitability" that offer a strong value proposition for all consumers, Leveille wrote.
Chris Senyek, chief investment strategist with Wolfe Research, is bullish on consumer spending too.
"We believe that U.S. retail sales, while volatile month-to-month, will remain strong over the coming months. With short-term interest rates now falling from Fed rate cuts, gasoline prices falling on a year-over-year basis, financial conditions continuing to loosen, and the wealth effect from stocks and housing very strong, we see the U.S. consumer staying strong overall," he wrote in a report.
But he also thinks investors should pick their spots wisely. He said that big broadline retailers, such as Amazon.com, are a good bet. Senyek also is making a bet on a rebound in the housing market as interest rates fall. He recommends makers of building products and home-improvement retailers such as Home Depot and Lowe's.
And he also recommends the cruise lines, which have all done well this year. Carnival, Royal Caribbean Cruises, and Norwegian Cruise Line Holdings are each trading near 52-week highs.
But some underperforming consumer names could get a lift as well. UBS analyst Michael Lasser is bullish on Target, which has lagged behind Walmart this year. Lasser wrote in a report Wednesday that the retailer should get a lift from Taylor Swift.
"Exclusive launches of a Taylor Swift book, CD, and vinyl should boost its comps. In light of what's anticipated to be a volatile holiday season, we think these launches should provide a differentiated driver of traffic," he said in a report, adding that the Swift partnership shows that Target "is focused on providing newness, innovation, and exclusivity." Lasser has a $200 price target on Tar-jay, implying a gain of more than 25% from current levels.
But investors shouldn't ignore international consumer stocks either. The Fed isn't the only central bank that is cutting rates to juice economic growth. Policymakers in Canada and Europe are both easing. And China has joined the party, taking steps to stimulate its struggling residential real estate sector.
Analysts at RBC Capital Markets said in a recent report that the Canadian convenience store chain Alimentation Couche-Tard, Anheuser-Busch InBev, and the German online fashion retailer Zalando are among their top picks for the fourth quarter. The RBC analysts are also bullish on PayPal, Venmo's owner, as well as Pinterest, a social media site with a heavy focus on e-commerce.
So even though consumer discretionary stocks have enjoyed a nice rally lately, the sector could have more room to run thanks to the improving economic backdrop. The holiday shopping season is right around the corner.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
October 16, 2024 12:08 ET (16:08 GMT)
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