On the surface, it appears as though consumer discretionary stocks are holding up well. The largest exchange-traded fund (ETF) dedicated to the sector eked out an October gain and some upside in the final week of the month.
Upon closer examination, it becomes clearer that basically all of that ETF's positive close to October was attributable to Amazon, the sector's largest component by market capitalization, gaining nearly 10% last Friday following an impressive third-quarter earnings reports.
Going further down the market cap ladder in this sector reveals both opportunity and weakness. Regarding the latter, shares of some highly recognizable brands were savagely repudiated last month, but that doesn't mean investors should rush to catch falling knives and that's exactly what at least two of the following three stocks are.
Image source: Getty Images.
Here are three already battered consumer goods names that could be in for more downside.
1. Don't hail this Caesar
Caesars Entertainment (CZR 2.10%) rallied on Oct. 31, but the ides of October came calling for this casino stock as it shed more than a quarter of its value last month -- a decline that's taken it dangerously close to levels last seen during the COVID-19 pandemic.
NASDAQ: CZR
Key Data Points
Admittedly, that's not an apples-to-apples comparison because, well, casinos were closed for months during the early days of the global health crisis. That's not the case this year. Rather, investors are dumping Caesars in part because visitation to the Las Vegas, where the company is the second-largest operator, is mired in a slump. CEO Tom Reeg confirmed as much on Caesars' third-quarter earnings conference call, telling analysts that the company's average daily room rate on the Strip over the summer was down "a little over 6%" while occupancy was off 5%.
Perhaps cementing the case for more near-term downside are at least two factors. First, management sounded more optimistic about the current quarter and 2026 Las Vegas convention business and the stock still sold off. Second, Federal Reserve Chair Jerome Powell said last week it's not guaranteed the central bank will lower interest rates in December. Lower rates are material to a debt-laden company like Caesars, which was saddled with outstanding liabilities of $11.9 billion at the end of the third quarter.
2. Bearish on burrito bowls
In another overt sign all is not well among some of the mid-tier players in the consumer discretionary sector, Chipotle Mexican Grill (CMG +0.73%) tumbled more than 23% last week after the company reported third-quarter same-store sales growth of just 0.3%. Compounding those woes was commentary from CEO Scott Boatwright indicating same-store sales slipped in October.
Translation: Consumers, particularly those in the younger demographics that comprise Chipotle's core customer base, aren't visiting the restaurants with the frequency needed to support the shares. That implies a potential rebound by the stock is largely rooted in either investors viewing it as a bargain or consumer sentiment shifting on a dime -- neither of which are guaranteed to materialize over the near term.
NYSE: CMG
Key Data Points
Chipotle also has to deal with some issues in the court of the public opinion. When the Consumer Price Index (CPI) spiked a while back, diners accused the company of shrinkflation -- charging higher prices for the same (or smaller) portions. Consistency is part of that equation. Last year, a Wells Fargo analyst ordered 75 burrito bowls from eight New York City stores, discovering that portion sizes varied dramatically. That's not a way for a restaurant chain to endear itself to cost-conscious consumers.
3. With this stock, sensitive consumers can't be ignored
Of the three stocks mentioned here, DoorDash (DASH 0.88%) is undoubtedly the strongest and the riskiest to be negative on. It's up more than 51% year to date, confirming strength and ample risk associated with bearish bets.
That warning should be acknowledged, but how DoorDash makes money should too. On the consumer-facing side of the business, DoorDash generates revenue through delivery and subscription fees. Subscribers aren't subject to the pesky delivery charges, but they need to make sure that they're using DashPass enough to warrant the $9.99 monthly or $96 annual charge. Sure, we're all guilty of getting some subscriptions we don't maximize, letting the business ding our credit cards every month until we take action. But as consumers look for ways to cut back, discretionary subscriptions could be prime targets.
Even if DashPass proves durable, that doesn't mean consumers will continue indulging DoorDash's fees. In fact, there are lessons from Caesars and Chipotle that DoorDash may want to heed. If cost-sensitive consumers are dialing back on leisure travel and dining out, they could easily take it step further and reduce their delivery spending, too.
Let's consider a real-time example of potential vulnerability for DoorDash. An order of chips, salsa, and a chicken burrito (no extra meat) from the nearest Chipotle to me costs $20.55 before tax in the store, but Chipotle's recent earnings report suggests folks are eschewing store visits. However, the price of this order climbs to $30.48 when factoring in DoorDash's delivery charge, other fees, and taxes, meaning the price increased nearly 50% without even tipping the dasher.
The point is if consumers are cutting back on dining out in the name of saving money, why would they spend more cash for the same product through DoorDash? Admittedly, it remains to be seen if DoorDash is punished on this front, but ignoring its potential vulnerabilities at a time when many restaurant stocks are floundering is risky.