What happened
The gut-wrenching rollercoaster ride that is 2022 continued for investors Wednesday, with a number of stocks rising to the occasion after several days of declines. There were reasons to be optimistic, as there was evidence consumer spending remained resilient. Reports from two bellwethers provided a dose of enthusiasm, as did better-than-expected consumer confidence data. Investors took the news as an excuse to wade back into the market today, buying up a broad swath of consumer-facing stocks.
With that as a backdrop, shares of Amazon (AMZN +1.25%) climbed 1.9% today, Apple (AAPL +3.26%) jumped 2.4%, and Chewy (CHWY +0.39%) surged 4.1%.
There was very little in the way of company-specific news, which suggests that market watchers got a much-needed boost of confidence from consumer data.
Image source: Getty Images.
So what
Consumer sentiment climbed in December, gaining ground on several metrics after back-to-back months of declines. The Conference Board's Consumer Confidence Index climbed to 108.3, up sharply from 101.4 last month, and higher than economists' prediction of 101. The expectations outlook also gained ground, advancing to 82.4, its highest level since January. Finally, the measure of current conditions rose to 147.2, its best showing since September.
A more favorable view of jobs and the economy aided the improvements across the board. The biggest contributor was slowing inflation, which was reflected in much lower gas prices.
Further buoying the market were positive results from Nike (NKE +0.09%) and FedEx (FDX 2.39%), with are both viewed as bellwethers of the broader economy.
For its fiscal 2023 second quarter (which ended Nov. 30), Nike reported revenue of $13.3 billion, up 17% year over year and up 27% in constant currency, resulting in diluted earnings per share (EPS) of $0.85. Both metrics far exceeded analysts' consensus estimates, which called for revenue of $12.6 billion and EPS of $0.64, so Nike sailed past expectations with ease. The results were driven higher by record Black Friday sales. Nike shares soared 12% on the news.
FedEx's results were similarly robust, given the state of the overall economy. While revenue of $22.8 billion came in below Wall Street's expectation of $23.7 billion, earnings per share of $3.07 far outpaced the $2.81 expected by analysts. The reports sent FedEx stock up more than 3%.
NASDAQ: AAPL
Key Data Points
Now what
So what does this all have to do with our trio of stocks?
- Consumers have generally been spending less, resulting in fewer e-commerce purchases on Amazon's e-commerce platform.
- Apple's portfolio of consumer products has also experienced weaker demand, as buyers have been reluctant to shell out for higher-end goods.
- Chewy's pet-centric e-commerce business has also experienced decelerating demand as pet owners have been trading down to lower-priced products, though managements focus on profits is beginning to pay off.
Improving consumer confidence might result in a loosening of consumer purse strings, resulting in higher spending, which would no doubt boost all three companies.
There was one piece of company-specific news that likely provided additional updraft today.
A recently announced European Union rule will soon allow Apple users to buy from third-party app stores, which in turn could weigh on Apple's results. Regarding the associated regulatory risks, Citi analyst Jim Suva believes these are more "headline risk rather than fundamental risk," and suggested any short-term pullback would be a buying opportunity. Suva maintained his buy rating and $175 price target, which suggests 32% upside for Apple shareholders compared to Tuesday's closing price.
For those that tend to view the glass as half full, take heart. Bear markets punish good companies and their weaker counterparts. As a result, each of these stocks are selling for much less than just a year ago, resulting in valuations that are much more compelling -- making two of these stocks screaming buys.
Apple is currently selling for roughly 6 times sales, when experts generally agree that a reasonable price-to-sales ratio is between 1 and 2. While it's cheaper than it has been in years, it isn't cheap in terms of traditional valuation metrics. That said, investors have awarded Apple a premium as the result of the company's strong history of growth and rosy prospects for future performance.
Amazon and Chewy are each selling for less than 2 times sales, resulting in their lowest valuations in years, and putting them squarely in bargain-basement territory.
For investors with the stomach for a bit of volatility, buying shares of each of these consumer companies while they're on sale will probably seem prescient years from now.
