This household name in family entertainment has been a staple of U.S. pop culture for generations. Walt Disney's (DIS -0.25%) theme parks and animated movies are popular everywhere. Today, the company also owns ABC, ESPN, Pixar, Marvel, Star Wars, and Hulu, and it acquired a vast array of assets from Fox in a 2019 deal.
Disney has a number of competitive strengths, including an unrivaled trove of intellectual property and a business model that enables successful movies, such as Frozen, to be spun into multiple business lines, including theme park rides, toys, consumer products, and even live entertainment.
Disney has restructured its entertainment business to make Disney+ its centerpiece, and its streaming business is finally profitable. The stock has underperformed for several years now, but the components are in place for success if it can successfully transition to streaming. The company plans to launch the streaming version of the flagship ESPN network, called ESPN Unlimited, in the fall of 2025, and that could help drive significant profit growth.
Consumer discretionary stocks vs consumer staples stocks
First, let's review some of the key differences between consumer staples and consumer discretionary stocks.
- Discretionary stocks sell wants, while staples sell needs
- Discretionary stocks tend to be more sensitive to the economic cycle, while consumer staples stocks are more recession-resistant.
- Both stocks pay dividends, but dividend investors generally favor consumer staples stocks.
- Consumer discretionary stocks tend to outperform in bull markets, while consumer staples typically do better in bear markets.
Strategies for investing in consumer discretionary stocks
Investing in consumer discretionary stocks is similar to any other stock market sector, but there are some special qualities to look for.
- Brand: Brand is a key distinguishing factor in the consumer discretionary sector, and many of the stocks that have historically performed well have strong brands. Consider the strength of the brand name when investing in this sector.
- Cyclicality: Consumer discretionary stocks are cyclical because they rely on spending on non-essential goods. Therefore, these stocks tend to struggle in down economies or when consumer spending is weak, which can create buying opportunities. For example, fast-casual restaurants have seen growth slow due to weakness in their customer base. Once, the job market returns to stronger growth, these stocks could bounce back.
- Business model: There's a wide range of business models in the consumer discretionary sector, ranging from restaurants to retail to travel and entertainment. It's worth considering the business model of the individual stock, and how resilient it is to disruption.
Pros and cons of investing in consumer discretionary stocks
Like any other sector, investing in consumer discretionary stocks has its pros and cons.
Pros:
- Made up of brands that are familiar to most investors.
- Can be big winners over time.
- Easy to assess their performance.
- Tend to do well in bull markets.
- Competitive advantage can be identified by brand strength.
Cons:
- Among the first businesses to get hit in a recession.
- At risk of black-swan events like the COVID-19 pandemic.
- Competition tends to be high.
- Inflation is a risk.
Factors to consider when choosing consumer discretionary stocks
In addition to factors that are worth considering with any stock, like growth rate and valuation, there are some things particular to consumer discretionary stocks.
- Brand strength: Brand isn't easy to measure, and it can change over time, but strong brands tend to correlate with strong stocks in the consumer discretionary category.
- Line of business: There is a range of subsectors in the consumer discretionary sector, and it's important to understand the nuances of industries like travel, restaurants, entertainment, and home goods. Some of these, for example, may be affected by tariffs.
- Exposure to the economic cycle: Most consumer discretionary stocks are sensitive to the economic cycle, but some are more so than others. You'll want to consider the degree of exposure a stock as a casino will be considerably more cyclical than a fast-food stock like McDonald's.
How to invest in consumer discretionary stocks
Investing in consumer discretionary stocks is just like buying any other stock. Here's what you have to do:
- Open your brokerage app: Log in to your brokerage account where you handle your investments.
- Search for the stock: Enter the ticker or company name into the search bar to bring up the stock's trading page.
- Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this stock.
- Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
- Submit your order: Confirm the details and submit your buy order.
- Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.
