How we Determine the top Consumer Discretionary Stocks?

The stock list above wasn't hurriedly made by an intern to meet the end of month deadline. StockBossUp's top stock lists are generated from the analysis of our thousands of users to discover which users are our gurus. Our top consumer discretionary stocks are chosen from these gurus.

But what is a guru when it comes to stocks? Our algorithm check a user's performance, volatility, and diversification to make sure they can perform at different dimensions of investing.

Analysis matters, and our algorithms look for articles focused on long term investing instead of hoping for short-term gains. Stock analysis with a strong focus on long-term investing trend well in our top stock lists.

We are committed to our users, our new visitors, and our future visitors to always trend the top analysis that may help our users perform better in the stock market. We are dedicated to wealth creation at scale and believe we can achieve this through trusted investment knowledge.

What are Consumer Discretionary Stocks?

Consumer discretionary stocks provide goods and services that consumers may choose to forego during an economic downturn. These products are non-essential^[1] and hence consumers have the discretion to forego purchasing items. This is the opposite of consumer staples like foods and household goods. Consumer discretionary is a very wide sector and include industries like gambling, streaming services, and clothing.

What’s the Difference Between Consumer Discretionary and Consumer Cyclical?

Consumer discretionary and consumer cyclical refer to the same stock sector. The term consumer cyclical refers to how the demand for discretionary, non-essential, goods will wax and wane with the business cycle.

Notable Consumer Discretionary ETFs

Vanguard Consumer Discretionary ETF (VCR)

The Vanguard Consumer Discretionary ETFs is one of the largest ETFs focused on consumer discretionary stocks. Its market cap as August 2022 was $167 Billion with 311 different stocks in its basket^[2]. The ETF follows the MSCI US investable market index ConsDiscretionary25/50 with the largest sub-sectors being^[3]:

• Internet & Direct Marketing Retail (24%)
• Automobile Manufacturers (18%)
• Restaurants (9%)
• Home Improvement Retail (9%)

Consumer Discretionary Select SPDR Fund (XLY)

XLY is part of the very popular select SPDR funds. The fund holds 56 stocks and has an expense ratio of 0.10%. The market value of XLY is 19 Billion and does provide a dividend.

IShares Global Consumer Discretionary ETF (RXI)

RXI is another consumer discretionary ETF to choose from. It has an expense ratio of 0.40% and net assets of $318 Million. This ETF is composed of global equities with its top positions being ^[5]:

• Tesla (TSLA – 10.13%
• Amazon (AMZN) -9.57%
• Home Depot (HD) – 4.53% The ETF has a global scale with about half of its companies from the U.S. and the rest coming from other parts of the world:

Source: RXI fact sheet^[5]

Industries in the Consumer Discretionary Sector

• Retail Distributors Direct – This would be companies like Target and Walmart
• Retail Distributors Internet – These companies include Amazon and eBay
• Automobiles – Examples include Tesla, Ford, and GM
• Auto Components – Examples include BorgWarner and Axalta Coating Systems
• Consumer Durables and Apparel – This includes stocks like Yeti Holdings and Nike
• Hotels – These are well known brands likes Wyndham Hotels and Resorts
• Restaurants – This includes Yum! Brands and McDonalds
• Leisure – Examples include Carnival Corporation and Booking holdings

What Makes a Good Consumer Discretionary Stock?

• A good consumer discretionary stock should protect itself from the cyclical nature of the consumer discretionary sector
• Companies in this sector must manage their total debt and enterprise value. These companies need to be able to withstand a long recession by managing their debt and having a strong strategic debt plan
• The company should consider diversifying to less the impact of their cyclical business. An example of this is Tesla diversifying into industrial batteries^[6]. This new business segment lies in the industrial sector which is insulated from consumer cycles.

Mistakes to Avoid When Investing in Consumer Discretionary Stocks

There are many common mistakes made by new investors that are universal across investment decisions; however, consumer discretionary stocks have some unique challenges new investors should be aware of:

• By their definition, consumer discretionary stocks are cyclical. When money is tight, these stocks will likely fall in value. This loss isn’t just investor psychology. These stocks will likely see a fall in revenue as well which won’t be reported until after the fall has occurred
• Consumer discretionary stocks are much more well known and are part of many retail investor’s lifestyle. However, a well known company can still be over valued and the companies valuation should be compared to its valuation.
• It is well known that these stocks are cyclical. However, trying to time this cyclical nature is not recommended for new investors. New investors should hold stocks for longer periods.

Consumer Discretionary Stocks and Volatility

Consumer discretionary stocks have inherent volatility due to the cyclical nature of the businesses in this sector. Consumer discretionary stocks ranked just behind Technology stocks in terms of volatility in the 2010s^[7].

References

1). 3 Consumer Discretionary Stocks For Your Watchlist Today by Brandon Michael

2). Vanguard Consumer Discretionary ETF

3). VCR portfolio composition as of August 2022

4). Select Sector ETFs by SPDR

5). RXI fact sheet

6). Tesla Industrial Batteries

7). The 8 Most Volatile Sectors by Marc Davis