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Consumer durable stocks are those of companies that produce and sell durable goods. Generally defined as products that last more than three years, durable goods include furniture, appliances, electronics, machinery, toys, tools, jewelry, firearms, and sporting goods.
Durable goods are the opposite of consumables, or fast-moving consumer goods (FMCG), such as food, paper products, medicine, cosmetics, and tobacco that are “consumed” shortly after they are purchased.
|Type of consumer goods||Definition||Product examples|
|Consumer durables||Consumer products that last longer than three years.||Cars, furniture, appliances, electronics|
|Fast-moving consumer goods||Goods that are consumed soon after purchase.||Food, beverages, paper products, cosmetics|
|Consumer staples||Everyday products that consumers depend on regardless of the economic environment.||Food, gasoline, medicine, cleaning products|
|Consumer discretionary goods||Goods that are purchased with extra or discretionary income. Non-necessities or luxuries.||Travel, entertainment, restaurants|
The best consumer durable goods stocks include those of companies with well-known brands, histories of innovation, strong track records of growth, and wide or expanding operating margins. Like the consumer discretionary sector, the durable goods sector tends to be cyclical since its products are generally expensive purchases that consumers are more likely to make when the economy is strong. During a recession is when they’re more likely to delay buying a new car or a dishwasher. For that reason, the Census Bureau’s monthly durable goods report is closely watched as real-time market data and an indicator of the health of the broader economy. Consumer durables, especially high-priced ones, tend to be discretionary purchases by nature.
Like most industries, consumer durables have been impacted by the COVID-19 pandemic. Early in the crisis, manufacturers were forced to slow production due to pandemic protocols and supply chain issues, which weighed on performance. However, demand for many of these products strongly recovered by the second half of 2020, and business is now growing, leading to a fast rebound for these stocks and making them well-positioned for the post-pandemic era.
Consumer durable stocks encompass a wide variety of sectors, and there is significant overlap between consumer durables companies and sectors such as tech, home improvement, and manufacturing.
Below are some of the top consumer durables stocks on the market today. All three of these stocks have been big winners during the pandemic as they have capitalized on the stay-at-home economy and the increased spending on durable products. Fortunately for these companies, consumers during the pandemic have limited channels for discretionary spending, with travel and entertainment off-limits.
|Consumer Durables Stock||Ticker||Product line(s)|
|Purple Innovation||(NASDAQ:PRPL)||Mattresses and bedding|
|iRobot||(NASDAQ:IRBT)||At-home robots, including the automatic vacuum Roomba|
|Trex Companies||(NASDAQ:TREX)||Composite decking products|
1. Purple Innovation is disrupting the mattress industry with its proprietary gel technology, Hyper-Elastic Polymer, which differentiates the company from its many competitors that rely on foam and other commoditized materials. Purple is also a digitally native brand that sells both through direct-to-consumer channels and at more than 1,800 retail stores, rapidly expanding from fewer than 200 stores in 2018. The company has been able to deliver profitable growth, with both strong operating margins and top-line growth. It will also soon be opening a manufacturing facility in Georgia, which will expand its capacity by 25%-30% and lower shipping costs to the East Coast. Finally, Purple should continue to benefit from the ongoing direct-to-consumer trend in bedding and the remote work movement since people moving out of cities means more bedrooms to furnish.
2. iRobot may be one of the most unique stocks on the market. While the company has competition in the floor-cleaning robot space, its Roomba is the best-known brand and strongest at the premium end of the market, which is the most profitable.
In 2020, iRobot’s revenue rose 18% to $1.43 billion, and the company expects to see continued gains in 2021 as it benefits from the tailwinds from the pandemic. The company continues to innovate, introducing the Roomba i3 and i3+, which feature three-stage cleaning and, in the i3+, self-emptying capability. As part of its educational program, it launched a coding robot last year that performs functions such as drawing and making music.
3. Trex has been an outperformer for a long time as the company is the world’s largest manufacturer of wood-alternative decking and railing. Its products are more durable than traditional wood-based competitors and offer advantages such as being mold- and mildew-resistant, less likely to fade or stain, and splinter-free.
Trex also has a history of delivering solid revenue growth and profits. In 2020, revenue increased 18%, and the company posted an operating margin (revenue less costs) of 28.6%, showing the benefits of its inherent competitive advantage. The company recently completed a facility expansion in Virginia that helped to increase its production capacity by 70%, paving the way for further revenue growth. Like Purple, the company stands to benefit from those moving out of cities and into suburban and rural areas.
Since consumer durables stocks tend to overlay with a diverse range of sectors, ETFs, or exchange-traded funds, don't cover consumer durables, but there are sector-specific ETFs in homebuilding and autos.
Some popular homebuilding ETFs include the following:
|SPDR S&P Homebuilders ETF||(NYSEMKT:XHB)||0.35%|
|iShares U.S. Home Construction ETF||(BATS:ITB)||0.42%|
|Invesco Dynamic Building & Construction ETF||(NYSEMKT:PKB)||0.59%|
Among the top holdings of these ETFs are homebuilders such as Lennar (NYSE:LEN) and D.R. Horton (NYSE:DHI); manufacturers such as Masco (NYSE:MAS), which makes plumbing products; and home improvement retailers such as Lowe’s (NYSE:LOW).
If you’re looking for an automotive ETF, the best choice is the First Trust NASDAQ Global Auto Index Fund (NASDAQ:CARZ), which has an expense ratio of 0.7%, and counts Tesla (NASDAQ:TSLA), General Motors (NYSE:GM), and Toyota (NYSE:TM) as its three biggest holdings.
Of the sector indexes available, the S&P 500 Consumer Discretionary Index (INDEX:S5COND) provides the best analog to consumer durables, tracking stocks such as Tesla, Home Depot (NYSE:HD), and Nike (NYSE: NKE).
In general, consumer durables companies are manufacturers with consumer-facing brands. Selling to the end consumer differentiates them from manufacturers that sell to other businesses or to institutions like governments, but they are best analyzed in the same way as other manufacturers.
Investors should consider consumer durables companies' margins, especially their gross margins, which show the percentage of revenue a company keeps after it pays for inputs such as materials and manufacturing labor. Research and development expenses, where applicable, can provide insight into how much a company is investing in its future products.
Finally, the growth rates of revenue and earnings per share are key metrics to consider with any company, and that’s true for consumer durables as well. Investors should prioritize companies that are growing faster than their peers and operating in markets with strong secular growth rates, meaning long-term growth that persists across business cycles. You can use a stock screener to identify companies according to the revenue and earnings-per-share metrics.
Consumer durables stocks offer a wide range of choices for investors seeking portfolio exposure to both the manufacturing and consumer-facing sectors. The cyclical nature of consumer durables also makes the sector a good investment choice ahead of the economic reopening since consumer-facing manufacturers are likely to do well post-pandemic.
Considering the wide variety of consumer durables stocks available, with growth, value, and income stocks all on offer, almost any investor should be able to find a consumer durables stock that suits his or her investing style.
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