Positioning for Cyclical Consumer Discretionary

Challenges and opportunities in the changing market environment

This article is written by Charles Sin was originally published as part of Amber Partner’s “Coronavirus Updates and Strategies” report.

Among the industries hit the hardest by the coronavirus pandemic is the consumer discretionary sector. However, upon the philosophy that stocks hit the hardest can bounce back the most, consumer discretionary may see a strong rebound as spending increases in tandem with future economic recovery. To make the most of this opportunity, we must look to firms that have the substance to brave through this storm, apart from that, we also look for those with the quickest path to recover. Consumer discretionary focuses on goods and services that are non-essential and are therefore very sensitive to economic cycles. The consumer discretionary sector has for long been one of the largest industries in the US, with a total market cap of around $5 trillion in 2019. Examples of consumer discretionary goods include high- end apparel and leisure travel. This article will focus on the consumer discretionary sector, how it is affected by the global economy, how we can navigate these trying times, and stocks worth looking out for as we near the second half of 2020.

As the title of this section suggests, consumer discretionary stocks are cyclical, meaning that their performance is generally affected by the health of the economy. Firms in the sector are generally expected to do well when unemployment is low and household incomes are high. As disposable and discretionary income rises, the general public will see an increase in their willingness and ability to spend on non- essential goods and services, leading to an increase in revenue for firms operating in the consumer discretionary sector. On the other hand, consumer discretionary stocks are likely to take a disproportionately large hit during economic downturns, as spending on non-essential goods and services will likely be massively reduced. The coronavirus outbreak has led to such a situation.

The traditional investing metrics cannot all necessarily be applied in the same way in today’s troubled macro-economic environment. The majority of firms have taken a substantial beating and have underperformed in comparison to recent years. The traditional focus on strong revenue growth and sales gains may not yield the same insight as almost all firms have underperformed, with companies such as Estée Lauder Companies (EL), Las Vegas Sands (LVS) and Dick’s Sporting Goods (DKS) suspending dividends. In order to reposition effectively for recovery in the consumer discretionary sector, it is important to look at the balance sheet of the company going into this pandemic, how it has fared in previous recessions and how prepared the firm is for braving the storm and continuing business. Going forward, these same companies will have massive potential to grow once investors recognise that we are entering into early cycle growth and start investing in them heavily. Below are stock picks worth looking into amid the global pandemic.

For an in-depth equity research of Park Hotels and Resorts (NSYE: PK), download the full Amber Partners report.

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