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These 11 consumer discretionary stocks should withstand cyclical headwinds

What are we looking for?

Consumer discretionary companies whose trailing return on capital is below historical levels, suggesting that there is room to grow their profitability.

The screen (add this screener here)

The consumer discretionary sector is cyclical, and a trend reversal is anticipated. Companies that have profited heavily from the pandemic environment, pushing their return on capital to unsustainable levels, can expect this key profitability metric to revert to historical levels in the next few quarters.

That said, not all consumer discretionary companies will be equally affected by the trend. A solid contrarian strategy is to buy companies where the return on capital is historically low – and sell when it is high.

With that in mind, we screened North American stocks focusing on the following criteria:

  • Market capitalization higher than $1-billion in their respective currency;
  • Five-year average annual return on capital higher than 10 per cent – we look for a company with proven long-term profitability;
  • Trailing return on capital lower than the five-year return on capital (and which, according to our strategy, can reasonably be expected to revert to its historical level);
  • Positive sales growth in the past three months – we look for a company with a positive industry trend (and this is how our list is ranked);
  • Three-month growth in net operating profit after tax (NOPAT) higher than 3 per cent.

For informational purposes, we have also included price-to-earnings, dividend yield and one-year price return. Please note that some ratios may be shown as of end of the previous quarter.

More about Inovestor

Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios, and easily communicate investment decisions with clients through client-friendly reports.

What we found

Consumer discretionary companies

TICKER NAME PRICE MKT VALUE  ($ MIL.) 3M SALES GRTH. (%) 3M NOPAT GRTH. (%) 5Y ROC (%) ROC (%) P/E 1Y PRICE RTN. (%) DIV. YLD. (%)
ABG-N ASBURY AUTOMOTIVE GROUP, INC. 182.72 4044 17.5 19.6 11.5 10.8 5.7 0.5 0.0
HLT-N HILTON WORLDWIDE HOLDINGS INC 142.17 39665 14.4 17.5 10.4 10.2 54.8 13.8 0.4
MAR-Q MARRIOTT INTERNATIONAL, INC. CLASS A 174.65 57163 13.6 12.9 10.5 10.4 38.7 22.6 0.7
CASY-Q CASEY’S GENERAL STORES, INC. 211.68 7856 10.2 10.6 11.4 11.1 24.6 -1.7 0.7
CHH-N CHOICE HOTELS INTERNATIONAL, INC. 131.01 7306 7.0 10.5 20.6 18.4 22.0 8.3 0.7
EA-Q ELECTRONIC ARTS INC. 141.00 39480 6.8 30.3 15.5 12.2 51.1 -3.2 0.5
TOY-T SPIN MASTER CORP 44.17 4541 5.4 27.8 16.7 10.4 15.1 8.9 0.0
IHRT-Q IHEARTMEDIA INC CLASS B 11.53 1640 3.8 22.7 11.2 6.9 74.2 -52.9 0.0
CMCSA-Q COMCAST CORPORATION CLASS A 42.93 192383 3.3 4.1 11.3 6.5 13.8 -24.6 2.2
DOL-T DOLLARAMA INC. 70.12 20532 2.9 20.5 30.0 25.2 32.2 30.7 0.3
MSM-N MSC INDUSTRIAL DIRECT CO., INC. CLASS A 84.52 4719 2.7 13.3 14.7 14.4 16.0 -8.0 3.9

Asbury Automotive Group Inc., one of the largest U.S. automotive retail companies, has a three-month sales growth of 17.5 per cent and a P/E of 5.7, the highest and lowest on our list, respectively. Auto dealerships benefited from rising used-car prices, sparked from high demand from consumers amid limited supply from auto manufacturers. But while overall performance was probably helped by the pandemic, volume growth was constrained by low supply. At the end of 2021, the company acquired Stevinson Automotive, a dealership group, and the NOPAT increased by a robust 19.6 per cent after the acquisition.

Hilton Worldwide Holdings Inc., a hotel and resorts company, has the second highest P/E at 54.8, which reflects the anticipation of a solid rebound in the company’s profitability as health restrictions ease and normalcy returns. This rebound seems confirmed by the three-month sales growth at 14.4 per cent, the second highest of our list. The return on capital is close to the five-year trend, but the COVID years are included in that number and so we could expect the return on capital to increase beyond the five-year return on capital for that industry.

Casey’s General Stores Inc., a convenience-store manager in the U.S. Midwest, achieved respectable three-month sales growth of 10.2 per cent and NOPAT growth of 10.6 per cent. Fuel sales, which represent about a third of Casey’s total revenue, fell dramatically during COVID. With gasoline prices now at historically high levels, the company could naturally generate healthy profits if it maintains a stable gross margin relative to its revenue for its service stations.

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.

Anthony Ménard, CFA, is vice-president of data management at Inovestor.

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