Investing in Top Consumer Discretionary Stocks

Updated: July 8, 2020, 12:38 p.m.

When it comes to shopping, there are things you need, and there are things that are more nice to have. The consumer discretionary sector covers that second category, the goods and services people spend money on when they have a little extra cash available.

Unlike consumer staples companies -- which make the bare necessities -- consumer discretionary stocks tend to do well when the economy is strong and people have more money, and poorly when times are tough and it's harder to make ends meet. Below, we'll look more closely at this part of the stock market and show you some top consumer discretionary stocks to consider.

What are consumer discretionary stocks?

Consumer discretionary stocks cover several different industries, but the one thing they have in common is that they all involve businesses that count on consumers spending money they don't need to spend. They include the following types of businesses:

  • Manufacturers of cars, trucks, and motorcycles
  • Tire makers and producers of auto parts and equipment
  • Homebuilders
  • Makers of furniture, appliances, housewares, and other home furnishings
  • Consumer electronics manufacturers
  • Apparel and luxury goods companies
  • Retailers of various kinds, including department stores, home-improvement retailers, computer and electronics retailers, home furnishings sellers, apparel stores, auto dealers, and specialty retailers
  • Direct-to-consumer retailers that sell goods by catalog, mail, or over the internet via e-commerce
  • Hotel, resort, and casino operators
  • Restaurant companies
  • Cruise operators
  • Providers of consumer services, including education

The fact that consumer discretionary stocks tend to rise and fall with the overall economy makes them cyclical stocks. In analyzing the sector to find the best consumer discretionary stocks, it's therefore important not just to look at recent performance, but also to consider how each company did over the course of the most recent economic cycle.

There are several consumer discretionary companies that stand out as being among the best in the business.

Top consumer discretionary stocks

Consumer Discretionary Stock Description of Business
Nike (NYSE:NKE) Athletic apparel and footwear
Starbucks (NASDAQ:SBUX) Coffeehouse chain
McDonald's (NYSE:MCD) Restaurant chain
Las Vegas Sands (NYSE: LVS) Casino resort operator
Booking Holdings (NASDAQ: BKNG) Online travel specialist

1. Nike

Nike (NYSE: NKE) has built up a dominant position in athletic footwear and apparel, with more than half a century of innovation in making sports equipment accessible to a broad consumer audience. The beauty of Nike's business model stems from its use of celebrity sports endorsements, tying the success of athletes to the use of the company's products. Long after Michael Jordan left the professional basketball court, Air Jordan shoes remain a mainstay of Nike's business. Nike’s market share in athletic footwear, recently estimated between 25% and 30%, remains well ahead of international competitors Adidas (OTC: ADDYT.Y) and ASICS (OTC: ASCCF). And with the global sportswear company reaching out to play a bigger role in fast-growing areas such as China, the sky's the limit for Nike's future growth.

2. Starbucks

Starbucks (NASDAQ: SBUX) has defined how much of the world starts its day, with its ubiquitous coffeehouses sporting lines out the door most mornings at locations across the globe. By introducing the European cafe concept to the American masses, Starbucks tapped into the urge for consumers to treat themselves to small things, and its premium beverages now have a loyal following the world over. You can see the company’s success in its comparable-store sales, which tell us how its business is growing without the benefit of opening new stores. For fiscal 2019, Starbucks’ comp sales grew a healthy 5% worldwide. The company has more than 31,000 locations across the globe as of the first quarter of 2020. Efforts to streamline ordering via mobile device have resulted in shorter wait times, making the Starbucks experience even more enjoyable for its best customers.

3. McDonald's

McDonald's (NYSE: MCD) has come a long way from its heyday in the mid-20th century, as the fast-food colossus has worked hard to keep up with the times. Innovations such as digital menus that automatically change throughout the day, automated kiosks for ordering, online and mobile order capabilities, and delivery options are making McDonald's more accessible than ever. At the same time, the restaurant chain still has an emphasis on value that keeps customers coming back for more. Even in the ever-changing restaurant space, McDonald's has found a way to stay not only relevant, but hip. Investors also like McDonald's for its consistent dividend payments. It has increased those payments to shareholders each year since the mid-1970s, and its payout ratio of around 60% means it can comfortably pay for that dividend out of its earnings.

4. Las Vegas Sands

Casino gambling is big business, and Las Vegas Sands (NYSE: LVS) is one of the largest global players in the industry. Although its name comes from the iconic Sands hotel in Las Vegas, Nevada, Las Vegas Sands actually gets more of its business from the Asian gambling capital of Macao, with several high-end properties located in the Chinese special administrative region. Almost two-thirds of Las Vegas Sands' $13.7 billion in revenue in 2019 came from Macao, dwarfing its casino competitors. With appeal both to high-rollers with money to spend and mass-market visitors who want to take advantage of the unique entertainment options it offers, Las Vegas Sands has something for everyone. As a result, its gross margin -- which shows us how well a company controls its up-front costs -- is strong, at nearly 80% over the past few years.

5. Booking Holdings

The internet revolutionized the travel industry, and Booking Holdings (NASDAQ: BKNG) was one of the pioneers of online travel. Founded as Priceline Group, Booking Holdings made travel more accessible to the general public through its auction-based "name your own price" tools. The company's acquisition of fellow travel website dramatically broadened the geographic scope of its hotel offerings, appealing to international travelers and giving it a competitive advantage over locally based websites. In 2019, the company booked 844 million room-nights across its hotel network. Even though its secret is out, Booking Holdings still has an unparalleled set of hotel, rental car, and airfare offerings that make it easier for its customers to travel wherever they want to go.

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