After getting shellacked during the pandemic, consumer discretionary stocks are now back in vogue. With the reopening now in full speed, sectors like travel, entertainment, and dining have bounced back. Consumers anticipate a strong recovery thanks to pent-up demand for activities that were off-limits during the crisis.
If you're looking to take advantage of some unique opportunities in the consumer discretionary sector, keep reading to see why Etsy (ETSY -2.17%), Alibaba (BABA 2.92%), and Revolve Group (RVLV 1.07%) all look like promising picks.
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1. A winning e-commerce marketplace
Unlike most of the consumer discretionary sector, Etsy, an online marketplace for crafts and handmade goods, saw its business soar during the pandemic, posting four straight quarters of triple-digit revenue growth. Online shopping was a major beneficiary of the stay-at-home trend, and Etsy saw strong sales in categories like home goods, jewelry, craft supplies, and even facemasks.
However, the stock is now down nearly 40% from its peak in February due to concerns about slowing growth and a stretched valuation. Those concerns seem overdone, though. The company said revenue growth would slow to 15%-25% in the current quarter as it laps triple-digit growth from the quarter a year earlier and loses the benefit of facemask sales. Investors should expect slower growth over the rest of the year as the company laps the blowout performance from the pandemic, but Etsy is still well positioned for long-term success.
The number of buyers and sellers on its platform has surged over the last year, nearly doubling, and many of them will remain beyond the pandemic. Etsy is a unique platform, and for both and buyers and sellers there isn't a similar marketplace offering the vast customer base or the breadth of unique products that Etsy has.
Meanwhile, the company also demonstrated the profitability of its model during the pandemic, turning in an adjusted EBITDA margin of 33% in the first quarter and earnings per share of $1.00. It now trades at a price-to-earnings ratio of just 44, which is surprisingly affordable for a company still looking at a considerable long-term growth opportunity.
2. An unstoppable Chinese tech giant
While Alibaba is generally considered a tech company, most of its business is e-commerce, giving it significant exposure to the consumer discretionary sector.
The stock has slipped in recent months after a crackdown from the Chinese government over monopoly concerns. In its fiscal fourth quarter, which it just reported, Alibaba actually posted a loss of $836 million due to a $2.8 billion fine imposed by the anti-monopoly regulator, and the stock sold off as it missed adjusted earnings estimates in the report.
However, Alibaba's business continues to grow briskly, with revenue up 40% to $24.4 billion in the quarter, excluding the impact of its acquisition of supermarket operator Sun Art. Alibaba's size also gives it considerable competitive advantages. It generates more than $1 trillion in annual gross merchandise volume, making it the world's biggest e-commerce platform, and it has other fast-growing businesses, including cloud computing -- which saw sales jump more than 50% last year to $9.2 billion -- as well as logistics, delivery, and digital entertainment. The growth of the Chinese economy presents a long-term growth opportunity for the company.
Despite its growth rate and market opportunity, Alibaba trades at a P/E ratio of just 21 after the recent sell-off, making it one of the best values on the market. While the specter of the Chinese government continues to lurk, it seems like the worst of the damage has passed with the $2.8 billion fine, and the stock has been more than adequately discounted, down by a third from its peak in October.
3. A perfect apparel reopening play
Apparel sales plunged during the pandemic as social distancing requirements and work-from-home policies meant that the only new clothes most people needed were for working out and lounging around the house.
That's changing rapidly as the pandemic situation has evolved, however, and the anticipation of social outings and events is starting to drive a boom in the apparel sector. Revolve Group, an online seller of high-end clothing, particularly "occasion-wear", looks like a prime beneficiary. After revenue fell 3% last year, sales ramped up by 22% in the first quarter, with a strong acceleration in March. Earnings per share jumped from $0.06 in the year-ago quarter to $0.30, showing profitability has significantly improved.
The results were well ahead of expectations, and the stock initially soared on the report, but then pulled back with the broader sell-off in growth stocks. The company said that sales in April have meaningfully accelerated from the 22% mark in the first quarter, another sign that it looks poised to get a significant tailwind from the reopening.
During a difficult 2020, the company showed it could turn a profit even in challenging circumstances, and the recent sell-off gives investors a great opportunity to get behind a stock ready to roar on the reopening.
