Consumer discretionary companies tend to fluctuate heavily with the economy because, unlike consumer staples, they sell products or services that are nonessential. If the economy is growing and consumers have more spendable income, then it's easier for their business to grow.
DuPont Formula
Looking for discretionary stocks that might be immune to the volatility and unfolding crisis in Europe? To help you get started, we listed companies that have a market cap north of $300M. We then scanned them for strong profitability -- a sign these companies are better able to weather economic storms.
Return on equity (ROE) is a widely used profitability measure. The higher the ROE the more profitable the company appears, but this profitability can come from many sources -- some better than others. In case you haven't heard of this technique, DuPont analyzes return on equity (ROE, or net income/equity) profitability by breaking ROE up into three components:
ROE
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
We therefore focus on companies with the following positive characteristics: Increasing ROE along with:
- Decreasing leverage, i.e., decreasing Asset/Equity ratio
- Improving asset use efficiency (i.e., increasing Sales/Assets ratio) and improving net profit margin (i.e., increasing Net Income/Sales ratio)
Companies with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.
Business section: Investing ideas
Below is a list of consumer discretionary stocks trading on U.S. exchanges that have seen encouraging DuPont trends.
The economy has been on a nice path to recovery since the New Year, so discretionary stocks might be fueled. (Of course, the way the market's been behaving these past few weeks could suggest otherwise.)
Take a look at our list below. Do you think these companies will see further growth? (Click here to access free, interactive tools to analyze these ideas.)
1. Coach (NYSE: COH): Engages in the design and marketing of accessories and gifts for men and women in the United States and internationally. Market cap at $19.51B, most recent closing price at $67.89. MRQ net profit margin at 20.29% vs. 19.57% y/y. MRQ sales/assets at 0.372 vs. 0.349 y/y. MRQ assets/equity at 1.539 vs. 1.562 y/y.
2. Harley-Davidson (NYSE: HOG): Produces and sells heavyweight motorcycles, as well as offers motorcycle parts, accessories, and related services. Market cap at $10.93B, most recent closing price at $47.21. MRQ net profit margin at 12.03% vs. 9.74% y/y. MRQ sales/assets at 0.149 vs. 0.13 y/y. MRQ assets/equity at 3.731 vs. 4.019 y/y.
3. BorgWarner: Engages in the manufacture and sale of engineered automotive systems and components primarily for power train applications worldwide. Market cap at $8.75B, most recent closing price at $76.31. MRQ net profit margin at 8.26% vs. 7.19% y/y. MRQ sales/assets at 0.304 vs. 0.288 y/y. MRQ assets/equity at 2.363 vs. 2.604 y/y.
4. PVH: Designs and markets branded dress shirts, neckwear, sportswear, footwear, and other related products worldwide. Market cap at $5.35B, most recent closing price at $75.98. MRQ net profit margin at 5.3% vs. 3.73% y/y. MRQ sales/assets at 0.227 vs. 0.206 y/y. MRQ assets/equity at 2.487 vs. 2.778 y/y.
5. Polaris Industries (NYSE: PII): Designs, engineers, and manufactures off-road vehicles. Market cap at $5.18B, most recent closing price at $75.36. MRQ net profit margin at 8.92% vs. 8.81% y/y. MRQ sales/assets at 0.551 vs. 0.508 y/y. MRQ assets/equity at 2.226 vs. 2.716 y/y.
6. Dean Foods (NYSE: DF): Operates as a food and beverage company in the United States. Market cap at $2.64B, most recent closing price at $14.31. MRQ net profit margin at 1.18% vs. 0.83% y/y. MRQ sales/assets at 0.558 vs. 0.385 y/y. MRQ assets/equity at -109.21 vs. 5.051 y/y.
7. Boston Beer (NYSE: SAM): Produces and sells alcohol beverages primarily in the United States, Canada, Europe, Israel, the Caribbean, the Pacific Rim, and Mexico. Market cap at $1.37B, most recent closing price at $105.98. MRQ net profit margin at 6.61% vs. 3.88% y/y. MRQ sales/assets at 0.408 vs. 0.389 y/y. MRQ assets/equity at 1.419 vs. 1.526 y/y.
8. UniFirst: Provides workplace uniforms and protective work wear clothing in the United States, Canada, and Europe. Market cap at $1.16B, most recent closing price at $58.26. MRQ net profit margin at 6.19% vs. 5.84% y/y. MRQ sales/assets at 0.264 vs. 0.242 y/y. MRQ assets/equity at 1.389 vs. 1.514 y/y.
9. Vera Bradley: Engages in the design, production, marketing, and retail of functional accessories for women under the ‘Vera Bradley' brand. Market cap at $899.52M, most recent closing price at $22.12. MRQ net profit margin at 14.94% vs. 13.01% y/y. MRQ sales/assets at 0.613 vs. 0.531 y/y. MRQ assets/equity at 1.77 vs. 3.203 y/y.
10. Shuffle Master: Develops, manufactures, and markets technology and entertainment-based products for the gaming industry worldwide. Market cap at $856.67M, most recent closing price at $15.59. MRQ net profit margin at 13.65% vs. 10.96% y/y. MRQ sales/assets at 0.178 vs. 0.139 y/y. MRQ assets/equity at 1.318 vs. 1.62 y/y.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Danny Guttridge does not own any of the shares mentioned above. Data sourced from Google Finance.
