5 Consumer Stocks That Beat the S&P 500


Dec. 20 2019, Updated 7:07 p.m. ET

The defensive nature, low valuation, consistent dividend, and robust financial performance made consumer stocks a hit among investors. Higher volatility in the broader markets owing to the US-China trade war, as well as increased scrutiny of FANG stocks, led investors toward safer options like consumer stocks.

Notably, the sector didn’t disappoint as the majority of consumer stocks outperformed the broader markets so far this year. We’ll restrict ourselves to the five consumer stocks that have outperformed the S&P 500 by a significant margin this year. Moreover, we believe these consumer stocks could sustain the uptrend in the coming quarters.

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Target: The best of retail

So far, Target (TGT) stock has increased by about 95% this year and has outgrown the S&P 500. Notably, the growth in Target stock is about 3.4x more than the S&P 500, which has risen by about 28%. Moreover, Target stock has also exceeded its peers’ stocks significantly. For instance, shares of Costco and Walmart have risen 44.2% and 28.9%, respectively, year-to-date.

The strong buying trend in Target stock resulted from its robust financial performance in the last several quarters. Target produced stellar comps growth in the past several quarters. On average, its comps increased by 4.5% in the previous eight quarters. Moreover, Target managed to expand margins, which is encouraging. Also, Target’s adjusted EPS increased at an average of 18% in the last seven quarters.

Despite Target stock’s strong run, analysts maintain a favorable outlook and expect the retailer to continue to produce good growth. Notably, Cowen analyst Oliver Chen named Target stock as the “best idea” for 2020, CNBC reported.

We believe Target’s expansion of digital fulfillment options, store remodeling, and focus on merchandising is likely to drive its comps in 2020. Moreover, cost savings, favorable mix, and share repurchases could support earnings growth.

Furthermore, Target stock’s valuation looks comfortable when compared to both Walmart and Costco. Notably, TGT stock’s valuation is well below its retail peers.

Lululemon stock laps Nike

Lululemon (LULU) stock has marked phenomenal growth so far this year. LULU stock is up about 84.3% YTD (year-to-date) and has outperformed peers by a wide margin. In comparison, shares of Nike (NKE) and Under Armour (UAA) are up 36.4% and 19.8%, respectively, YTD.

The uptrend in Lululemon stock is due to the company’s strong performance on each front. Its revenues have grown at a double-digit rate in the last 10 consecutive quarters and outperformed Wall Street’s consensus estimates.

Meanwhile, its ability to charge premium pricing, strong brand patronage, innovation, and geographical expansion fuel sales and margin growth. Stellar sales and margin growth drove double-digit growth in its bottom line. On average, LULU’s EPS increased more than 28% in the previous eight quarters.

We see Lululemon as one of the strongest companies in the athletic apparel segment. We believe Lululemon would continue to produce above-average growth despite tough comparisons. Moreover, the company could continue to outgrow peers, including Nike, in terms of sales and earnings growth.

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Digital transformation, the growing contribution from direct-to-consumer business, and innovation could continue to drive Lululemon’s revenues and margins. Moreover, the expansion of its stores in China, growth in the men’s category, and lower product costs could continue to boost its top and bottom lines in the coming quarters.

Chipotle outpaces its peers

Chipotle stock has surged 93.1% year-to-date and outperformed the broader markets by a significant margin. The uptrend in Chipotle stock is due to its above-industry growth in the last several quarters.

Chipotle’s comps growth rate has accelerated sequentially in the last seven consecutive quarters. Higher transactions and an increase in average check size drove double-digit growth in Chipotle’s comps in the previous reported quarter. Plus, the opening of new stores boosts the company’s top-line growth.

Moreover, Chipotle’s top line benefits from stellar growth in digital sales. Its digital sales soared 87.9% during the last quarter and represented about 18% of its total revenues.

Robust sales and menu price increases boost Chipotle’s margins, which continue to expand despite the higher cost of ingredients.

Notably, Chipotle’s bottom line is growing at an astounding rate. Its EPS rose by 60%, 39%, and 77% in the first three quarters of 2019, respectively. The stellar growth in Chipotle’s bottom line comes amid tough year-over-year comparisons. For instance, Chipotle’s EPS jumped 37% in 2018.

We believe Chipotle stock could continue to gain from its digital expansion. Moreover, new store openings and the addition of drive-through lanes could further support growth. Also, menu price increases are likely to drive margins.

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Warren Buffett acquires a stake in RH stock

RH (RH) stock is up 86.2% year-to-date and has outperformed its peers, including Home Depot (HD) and Lowe’s (LOW), by a considerable margin. The uptrend in RH stock is due to the company’s robust financial performance.

In November, Warren Buffett disclosed a stake in RH stock. Buffett’s Berkshire Hathaway owns about 1.21 million RH shares.

Notably, RH’s management raised its full-year guidance for the fourth time this year. Upbeat guidance and Warren Buffett’s stake boosted investors’ confidence in RH stock.

RH expects its adjusted EPS to mark 48%–50% growth in fiscal 2019. Meanwhile, analysts expect RH to sustain momentum in fiscal 2020 as well and report about 19% growth in its EPS.

In comparison, Home Depot has lowered its sales outlook twice. Moreover, lower lumber prices and a delay in the realization of benefits from investments continue to hurt its outlook.

RH stock is trading at a forward earnings multiple of 16.4x, which looks attractive given the strong growth expectations. RH’s above-average growth compared to its peers and low valuation is likely to support the upside in its stock.

Tyson Foods stock rises on protein demand

Tyson Foods (TSN) stock is up about 68% year-to-date. Higher demand for protein-rich products supports Tyson Foods revenues and its stock price. Tyson Foods’ diversified portfolio and an outbreak of African swine fever are likely to boost its top line in the coming quarters.

Also, Reuters recently reported that Tyson Foods received approval to ship American poultry to China, which is positive.

We believe that the sustained global demand for protein products could drive its financials in the coming quarters. Moreover, Tyson’s foray into plant-based meat products could further boost its sales and stock price. Tyson Foods launched plant-based nuggets and doubled the retail distribution of these products.


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