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These Consumer Stocks Rose More than 65% in 2019

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Consumer stocks had a truly phenomenal 2019. A solid macroeconomic backdrop, steady business, and sound financial performances helped most companies in the consumer space outpace the broader markets by a wide margin.

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What conditions helped consumer stocks?

A record-low unemployment rate, higher wages, and low interest rates drove consumer spending and, in turn, consumer stocks in 2019. Strength in companies’ base businesses and investor favoritism for the sector also supported this growth. Digitalization and compelling promotions also drove sales.

As we said, most stocks in the consumer sector handily exceeded the S&P 500’s performance in 2019. Now let’s take a look at five consumer stocks that delivered more than 65% growth in the year.

Best Buy

Best Buy (BBY) stock rose about 66% in 2019, outpacing the S&P 500 by a wide margin. Its return was 2.3 times higher than the S&P 500’s return of 29% in the year.

The surge in Best Buy stock reflected the company’s robust financial performance, especially in the domestic market. Best Buy remained unharmed by the US-China trade war in 2019. Its strong positive earnings surprise history also boosted investors’ confidence in its stock.

In the last three quarters, Best Buy has beaten Wall Street’s estimates by an average of about 12%, which is impressive.

We believe Best Buy’s addition of convenient shopping options is likely to support its top line in the domestic market in 2020. The company has expanded its online fulfillment options, and we believe it will continue to do so in 2020.

The retailer offers free next-day delivery services without the hassles of membership or a minimum purchase requirement. It offers same-day delivery across 42 markets. We believe this hassle-free approach will also boost its traffic.

Like its rivals, Best Buy also offers in-store pickup services, with most orders being ready within an hour. It also offers curbside pickup.

Best Buy stock is trading at a lower valuation multiple than its peers. The stock’s forward PE of 14.0x is significantly lower than the peer average of 20.8x. BBY is also trading at 7.6x its next-12-month enterprise value-to-EBITDA multiple, which is below the peer average of 11.5x.

We believe digital offerings and a low valuation could support BBY’s performance. However, lower margins and tough YoY (year-over-year) comparisons could crash the party.

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RH

In 2019, RH (RH) stock rose 78.2%, about three times higher than Home Depot (HD) stock’s growth and 2.6 times higher than Lowe’s (LOW) stock’s growth. RH stock also outpaced its peers in 2018. It rose 39% in the year, while Home Depot and Lowe’s fell 9.3% and 0.6%, respectively. Shares of Bed Bath & Beyond fell 48.5% in the period.

RH also outperformed both Home Depot and Lowe’s with its revenue and earnings growth rate, which drove its stock up. Further, its higher growth and low valuation compared to its peers’ supported its upside.

RH has increased its guidance four times in fiscal 2019, which is commendable and has boosted investors’ confidence. Moreover, ace investor Warren Buffett’s Berkshire Hathaway disclosed a stake in RH stock. In comparison, Home Depot has cut its guidance twice.

Furthermore, RH stock looks undervalued, which could drive its performance in 2020. For example, the stock is trading at a forward PE of 16.0x, which looks attractive given the projected growth rate of about 19% for its EPS in 2020.

We believe the stock’s low valuation and high growth are likely to drive it up in 2020. It’s corrected a bit recently, but we believe the pullback could be an opportunity to go long on it. Meanwhile, its exit from underperforming businesses is likely to drive profitable growth.

Lululemon

Lululemon (LULU) stock rose 90.5% in 2019, handily beating out the S&P 500 as well as peers Nike (NKE), Under Armour (UAA), and Columbia Sportswear (COLM). The stock also generated higher returns than all of its competitors in 2018.

In 2018, shares of Lululemon surged about 55%. Meanwhile, shares of Under Armour, Nike, and Columbia Sportswear increased by 22.5%, 18.5%, and 17.0%, respectively, in 2018.

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Lululemon’s outperformance has stemmed from the robust growth in its revenue and earnings. Its bottom line has continued to grow at a double-digit rate for the last several years. Moreover, its EPS have increased at an average rate of nearly 28% in the last eight quarters. Its top line has exceeded analysts’ estimates for the last ten consecutive quarters and increased at a double-digit rate.

We believe Lululemon’s strong customer base, premium pricing, and growth in higher-margin direct-to-consumer business could continue to drive strong sales and earnings growth for it in 2020. Its digital transformation and expansion in high-growth geographies could further support its growth. Sustained demand for athletic apparel should also continue to support its revenues and EPS.

We believe Lululemon remains the top player in the athletic apparel segment and could continue to outgrow its peers in 2020.

Lululemon is expanding its store base in China. Moreover, its men’s category is gaining traction. Higher sales and lower costs are likely to support Lululemon’s sales and EPS growth and, in turn, its stock.

Analysts expect Lululemon’s top line to mark about 15% growth in fiscal 2020. Moreover, analysts expect its EPS to register a rise of about 19% in fiscal 2020 despite tough YoY comparisons.

Target was the best-performing consumer stock

Target (TGT) stock surged 94.0% in 2019 and considerably outperformed both its peers and the S&P 500. In comparison, Walmart (WMT), Costco (COST), and Kroger (KR) stocks rose 27.6%, 44.3%, and 5.4%, respectively.

The astounding growth in Target stock was the result of its stellar performance on the sales, margin, and earnings fronts. Target’s comparable sales have grown at a healthy pace despite tough comparisons and heightened competition. On average, its comparable sales have increased by more than 4% over the last eight quarters.

Target has also managed to drive profitable growth despite increased investments in business and higher digital fulfillment charges. Target’s gross and operating margins have expanded so far in fiscal 2019 thanks to its favorable mix and cost savings.

Higher sales and margins combined with share repurchases have driven double-digit growth in Target’s EPS in the last seven quarters. For instance, its adjusted EPS have increased by an average of 18% in the last seven quarters.

While most analysts maintain a positive outlook on Target stock, analyst Oliver Chen of Cowen deems it a “best idea” for 2020, as per a CNBC report.

We believe the uptrend in Target stock is likely to sustain in 2020. Analysts’ estimates indicate that Target’s sales and EPS could grow at a healthy pace despite tough YoY comparisons. Analysts project high-single-digit growth in Target’s bottom line in fiscal 2020.

Sustained momentum in comps, margin expansion, and share repurchases could continue to drive the company’s EPS and, in turn, its stock. The company is also likely to boost investors’ returns through higher dividends and buybacks.

TGT’s valuation is within reach compared to both Costco and Walmart. It continues to trade at a lower PE multiple than the peer average.

Chipotle

Chipotle (CMG) stock rose 93.9% in 2019, outperforming its peers in terms of growth. In comparison, shares of Wendy’s (WEN), Shake Shack (SHAK), McDonald’s (MCD), and Starbucks (SBUX) rose 42.3%, 31.2%, 11.3%, and 36.5%, respectively.

The robust growth in Chipotle stock reflects the company’s impressive sales and earnings growth over the last several quarters. Chipotle’s top line has grown consistently at a double-digit rate for the past four consecutive quarters. This impressive sales performance is the result of the accelerated growth in its comparable sales.

For instance, Chipotle’s comparable sales growth rate has accelerated in the last seven consecutive quarters. In the last quarter, Chipotle’s comparable restaurant sales rose 11%, reflecting a 7.5% increase in transactions. Meanwhile, menu price increases drove its average check size.

Thanks to its stellar sales and margin expansion, Chipotle’s EPS are growing at an above-average rate. Its EPS rose 37% in 2018 and 60%, 39%, and 77%, respectively, in the first three quarters of fiscal 2019.

We expect Chipotle to sustain its above-industry growth rate in 2020 as well. New store openings, digitalization, the rollout of drive-through lanes, and menu price increases are likely to drive its sales and margins in the coming quarters.

More new stores and share buybacks are also likely to support its sales and earnings growth and, in turn, its share price.

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