Investors love growth, which is a major reason why they are attracted to stocks in the so-called "consumer discretionary" segment. That market sector is home to many of the country's most successful businesses, including e-commerce titan Amazon.com and fast-food giant McDonald's. But what defines a consumer discretionary stock, and which ones dominate their industries?

Below, we'll answer those key questions and take a closer look at the 10 biggest consumer discretionary stocks on the market.

A man and a woman shop for a new TV.

Image source: Getty Images.

What are consumer discretionary stocks?

A consumer discretionary stock is a business that markets goods or services to people with money to spend over and above their baseline needs. Put another way, it's a company that deliveries luxuries or products that aren't considered essential to a household's monthly budget.

Consumer discretionary stocks differ from "consumer staples" on that key point because staples sit in non-negotiable spending categories like personal hygiene, groceries, and home cleaning. Discretionary purchases, on the other hand, involve categories such as travel, home improvements, and eating out. Basically, if it's something that you'd cut out of your budget during tough economic times, it's discretionary.

What industries are included in consumer discretionary?

The segment is made up of 11 industries, including non-grocery retailing, household durables, e-commerce retailing, automobiles, hotels, restaurants and leisure, and apparel. Together, these account for $5.5 trillion of market capitalization as of mid-2019 to make them fourth in size out of the 11 broad sectors that constitute the U.S. economy. The consumer discretionary segment is far larger than the $3.7 trillion of stocks that comprise consumer staples, but that gap has a lot to do with the fact that markets have been in a long period of expansion. Discretionary stocks tend to fare better during boom times, while consumer staples hold up particularly well during downturns.

Why invest in consumer discretionary stocks?

If investor attraction to these stocks could be boiled down to one factor, it would be growth. Consumer spending powers most economic growth in the U.S. economy, and so companies that operate in this segment can see long periods of rising sales. Their often-premium services command high prices, too, and that fact can translate directly into robust earnings growth.

A major drawback to that positioning is that these businesses can endure sharp slowdowns during industry downturns. Thus, investors must be prepared to tolerate volatility as part of natural industry boom-and-bust cycles that don't apply as much to consumer staples.

The 10 biggest consumer discretionary stocks

Here are the 10 largest companies in the consumer discretionary segment, as ranked by market capitalization, or the total market value of a company's outstanding shares of stock.

Company

Description

Market Capitalization

Amazon.com (NASDAQ:AMZN)

Leading e-commerce retailer

$957 billion

Home Depot (NYSE:HD)

The home improvement industry's biggest retailer

$239 billion

McDonald's (NYSE:MCD)

Fast-food chain specializing in providing value and quick service

$165 billion

Nike (NYSE:NKE)

Premium athletic apparel manufacturer

$137 billion

Starbucks (NASDAQ:SBUX)

Coffee chain selling beverages and food items around the world

$120 billion

Booking Holdings (NASDAQ:BKNG)

Vacation travel booking specialist

$85 billion

Lowe's (NYSE:LOW)

Home improvement retailer

$81 billion

TJX Companies (NYSE:TJX)

Off-price apparel and home goods retailer

$68 billion

General Motors (NYSE:GM)

Automobile manufacturer

$59 billion

Target (NYSE:TGT)

Home products retailer

$45 billion

Data source: Yahoo! Finance. Market capitalization data as of July 27, 2019.

Here are some important things for investors to know about each of these consumer discretionary giants.

1. Amazon.com

Amazon has come a long way since CEO Jeff Bezos launched a tiny website in the late '90s with ambitions to disrupt the book industry. It has gone on to reshape global retailing and routinely accounts for nearly half of all online sales.

As opposed to a "staples" retailer like Walmart, which dedicates a huge portion of its selling space to groceries, Amazon's top-selling product niche is consumer electronics. It traditionally hasn't made much profit from these sales, with most of its earnings going right back toward building out the massive distribution network that's required to put most of the population within its one-day shipping fulfillment window.

Yet investors still love this stock, in part because of the lead it is building in a massive industry that has many years of market-beating growth ahead. Consider that the e-commerce segment has roughly doubled as a percentage of the broader retailing world in the 10 years between 2009 and 2019, but in that time Amazon's annual sales have rocketed higher by over 800%. There could be decades of further growth for Amazon given that e-commerce sales still only sit at about 10% of the broader retailing industry.

2. Home Depot

Home Depot's business illustrates some of the biggest risks (and benefits) of investing in a consumer discretionary stock. The retailer saw its sales and profitability metrics slump in the wake of the 2008-2009 Great Recession as consumers pulled back on home improvement spending to help shore up their finances. Revenue and operating profit margin both declined 40%, and the company chose to hold its dividend steady for a period of almost three years to compensate. Since then, though, shareholders have benefited from growth for ages, with annual revenue on pace to almost double in the decade ending in 2020 to roughly $120 billion.

The investor attraction to this business is clear when you compare it to its closest rival, Lowe's (see No. 7 below). Home Depot routinely trounces its smaller peer on key growth metrics like customer traffic, market share, and sales. It churns far more profit out of each sales dollar, too. Home Depot's management team is famously adept at allocating capital, including by aggressively repurchasing shares in recent years. These assets serve investors well, whether or not the housing market is in a cyclical upturn.

3. McDonald's

The restaurant industry is famously brutal, with a sky-high failure rate, razor-thin profit margins, and shifting consumer tastes that always threaten to crush a given business. Yet McDonald's has parried these challenges as it captured, and defended, the fast-food crown over the last few decades.

Part of the allure of this business comes from its unparalleled scale and brand power. There are 36,000 restaurants sprinkled across almost every country in the world, after all. And Mickey D's near-staple status in consumers' food budget is reflected in the fact that the Big Mac recently celebrated its 50-year anniversary and is still a core menu item. The chain also avoids many of the financial risks inherent in this industry by operating under a highly profitable franchise model.

McDonald's isn't immune from shifts in consumer preferences and lately has had to make major changes to its menu to introduce fresher ingredients and more premium food and drink options. It has also poured resources into remodeling and upgrading its stores, including by adding online ordering and delivery functionality. Yet the fact that McDonald's can spend nearly $2 billion on that growth initiative in a single year helps illustrate just how hard it would be for smaller rivals to challenge the fast-food leader.

4. Nike

A leader in athletic apparel, Nike earns money by producing and marketing footwear and clothing to athletes around the world. The company routinely outgrows smaller industry peers, in part because its global scale allows it to spend billions on advertising and marketing, or what management calls "demand creation" expenses. These include sponsoring events like the World Cup and the Olympic Games and signing up world-class professional athletes as brand ambassadors. Nike spent $3.7 billion on marketing support in fiscal 2018 alone.

The company relies on innovative product releases across its dozens of sub-brands (including Air Jordan, Converse, and React) to drive sales growth. Increasingly, those products are being marketed directly to consumers through Nike's app and websites rather than through its retailing partnerships with companies like Foot Locker. This shift promises to lift profit margins over time because direct sales are about twice as profitable as wholesale sales.

Many companies, including lululemon athletica and Under Armour, have targeted the same consumer niches as Nike. However, as long as the company maintains its innovative lead, its competitive advantages make it difficult to take away any of its market share.

5. Starbucks

Starbucks has built a global empire by making premium coffee drinks seem more like a staple part of consumers' budgets than a luxury, once-in-a-while splurge. The beverage giant rewarded investors handsomely along the way, too, with its phenomenal growth powering a 160-time return for shareholders in the 22 years following its 1992 IPO.

The company's growth opportunities are much smaller today given that its stores already blanket the core U.S. geography, as well as many international markets. But it would be a mistake to believe that Starbucks can't continue delivering for shareholders.

The chain has several major expansion initiatives in the works today, including repeating much of its U.S. growth success in China and using mobile ordering and delivery to dramatically boost its addressable market. Its success ultimately rests on its ability to continuously outgrow the wider industry by delivering a cafe experience that consumers value enough to make a part of their daily routines. Starbucks hasn't wavered far from that ambitious goal through its first few decades as a public company, and that success suggests more gains ahead for the business -- and the stock.

6. Booking Holdings

Spending on vacations tends to rise sharply during economic boom times, and Booking Holdings, formerly known as Priceline Group, is a major beneficiary of that bounce. Through its network of travel booking sites including Booking.com, Priceline, and Kayak, it earns commissions on everything from hotel stays to flights and rental cars. The company has seen phenomenal growth in recent decades thanks to several major trends, including the shift toward self-directed vacation bookings over the use of travel agencies. Booking Holdings reported $14.5 billion in revenue in 2018, up from $12.7 billion the previous year.

Its tech roots mean that Booking Holdings must continuously improve its e-commerce shopping experience, which mainly occurs through desktop and mobile devices. Its major assets that contribute to this experience include a large portfolio of bookable rooms, flights, and restaurant reservations; competitive prices; and a smooth purchasing process supported by customer reviews. In some years, spending on these priorities might pressure earnings growth. However, Booking Holdings shareholders can be reasonably confident that these investments will continue paying off by delivering market share gains in this attractive industry.

7. Lowe's 

Lowe's has a well-deserved reputation for consistently playing catch-up with industry leader Home Depot. But the retailing chain is an attractive business in its own right. Some of its best qualities include a long track record of growth and profitability through every part of the growth cycle -- and a dividend growth streak that's unmatched in the industry.

Yes, Lowe's customer traffic and profit margins trail Home Depot's metrics routinely enough that investors can't assume the company will ever truly challenge its chief competitor on these points. Still, that performance gap often means the stock is available at a relative discount, both in terms of price-to-earnings and price-to-sales valuations. That factor lessens the risk that investors will overpay when seeking exposure to the home improvement industry.

Lowe's efforts to improve on its operating performance have sped up with the appointment of CEO Marvin Ellison, who was a highly placed executive at Home Depot for many years. Yet even if the chain continues to trail its peer, investor returns will be bolstered by the retailer's dividend, which has plenty of room to grow given its modest payout ratio.  

8. TJX Companies

Like Starbucks, TJX Companies straddles the line between consumer staple and consumer discretionary stocks. After all, the owner of the TJ Maxx, Marshalls, and Home Goods brands has achieved growth through a wide range of selling environments, with comps rising in each of the last 23 years. That impressive streak is a testament to its off-price selling model, which takes advantage of inventory mismatches in the industry to offer high-quality merchandise to shoppers seeking deep discounts.

A perennial worry on Wall Street is that TJX Companies' buying opportunities will dry up, either due to robust industry growth or better inventory management on the part of full-price peers. But that issue hasn't impacted the business, either during boom times or during retailing downturns. Investors can credit that success, in part, to the chain's flexible -- and constantly changing -- product mix. Customers visit the stores expecting a treasure-hunt atmosphere, and so they aren't disappointed when items come and go from the shelves.

TJX's management team believes the chain still has room to significantly expand its store base, and its growth outlook is further bolstered by the fact that e-commerce represents just a tiny fraction of its annual revenue. Investors also love the fact that dividend payouts have increased for over 20 consecutive years, making TJX one of just a few retailers to join the exclusive Dividend Aristocrat club.

9. General Motors

Spending extra cash on a new car is a pastime that's as popular for consumers in places like Europe and China today as it has been in the United States for decades. And General Motors stock represents a good way to gain exposure to this key industry.

GM operates several iconic car brands, including Cadillac, GMC, and Chevrolet. Together, its portfolio gives it roughly 17% market share in the U.S., with the truck niche weighing in at an even more impressive 25%. Worldwide, the company claims 9% of all new car sales.

The auto industry is intensely cyclical. Since used products so easily meet most consumers' needs, and because new car purchases often require financing, these are among the first products that people cut out of the budget during stressful economic times. Car manufacturers have to deal with high fixed costs, too, which adds risk to the business around managing capacity so that supply doesn't outpace demand.

GM likes to operate far from this danger zone, with the breakeven point in the U.S. somewhere around 11 million units compared to 21.5 million sales in 2018. Growth has been hard to come by, but a long-term shift toward premium trucks and SUVs is supporting higher margins. Looking further out, investors see China, its biggest market, as a source for many more years of product gains to come.

10. Target

Target has carved out a defensible retailing niche by focusing on selling premium apparel and home products at unbeatably low prices. The company strikes that balance with help from a large selling base and a brand that has come to be associated with upscale (but affordable) merchandise.

Target has stumbled in recent years, including through a failed attempt to expand into Canada. The company has also posted weaker profitability as it spent heavily on transitioning itself into more of a multichannel retailer. However, Target has maintained its rock-solid financial strength through all of these challenges, as evidenced by the fact that it has paid out -- and increased -- its dividend for more than 40 consecutive years.

Just a start

Ultimately, the range of consumer discretionary businesses goes far beyond just the 10 companies described above. But for an investor interested in gaining exposure to this high-growth segment of the economy, these companies are a great place to start. After all, the same characteristics that helped them achieve leading and enduring positions in their industries are likely to support market-beating returns in the future.