While most stocks and the underlying sectors are struggling to post gains in 2015, the consumer discretionary sector has been one of the top performers this year. With the U.S. economy showing signs of sustained growth, consumer discretionary stocks may continue to be the top performers in 2016.
Consumer Discretionary Sector
The poor will, unfortunately, always be with us. So too will the rich. That’s why it’s always a good idea to keep your eye on discretionary stocks. They won’t all perform well all the time—show me a stock that does—but they can surprise to the upside when the rest of the market is going down or sideways.
Case in point, the Consumer Discretionary Select Sector SPDR ETF (NYSEArca:XLY), which tracks the performance of consumer discretionary stocks on the S&P 500, has been handily outperforming the S&P 500 for 2015 and over the last 12 months.
Since the beginning of January, the index has climbed 5.01%. This is in sharp contrast to the S&P 500 which is down 5.1% so far. At the start of August, before Black Friday gutted most of the market, the index was up 11.7%. The S&P 500, on the other, hand was up just 2.2%.
Year-over-year, XLY is up an impressive 14.2%; the broader S&P 500 is down approximately one percent.
Q2 GDP up 3.9%
For a country that has little to celebrate economically, second-quarter gross domestic product (GDP) data was certainly encouraging. Consumer spending, which accounts for more than 75% of U.S. economic activity, helped boost second-quarter GDP to a seasonally adjusted annual rate of 3.9%. (Source: bea.gov, September 25, 2015.)
That’s a significant increase over the paltry 0.6% increase in the first quarter. This does not mean the U.S. economy is in the clear and ripe for four percent+ GDP gains in the second half of the year or 2016. Far from it. Many expect third- and fourth-quarter GDP numbers to retrace from the current level. That’s because a large part of growth in second-quarter consumer spending was driven by healthcare and transportation. And you can’t use that as the foundation for long-term growth.
That said; there are a number of consumer discretionary companies that have been outpacing the broader market and are poised for another year of strong gains in 2016.
3 Top Luxury Stocks to Watch in 2016
Investors interested in looking for a stock amid the Black Monday sell-off might want to keep an eye on Williams-Sonoma Inc. (NYSE:WSM). Williams-Sonoma is a leading high-end retailer (and e-tailer) that sells goods for the home.
The company’s retail chains include: Williams-Sonoma (upscale cookware), West Elm (modern housewares), Rejuvenation (lighting and hardware), Mark and Graham (monogrammed gifts), Pottery Barn, and Pottery Barn Kids (housewares, furniture).
While the company’s share price is down roughly 11% since Black Monday, it is still up roughly five percent so far this year. In addition to the chaos of Black Monday, investors sold off Williams-Sonoma after so-called disappointing second-quarter results. The company’s net revenues increased 8.5% to $1.127 billion while net income was up six percent at $53.7 million (or $0.58 per share). (Source: williams-sonomainc.com, last accessed September 25, 2015.)
EPS may have met projections, but the company’s margins disappointed Wall Street. That said, much of the disappointment came from transitory factors such as labor disputes at West Coast ports that led to shipping delays.
On the bright side, Williams-Sonoma is shielded from much of the global economic malaise as more than 90% of its stores are in the U.S. On top of that, last year, roughly 65% of its merchandise came from outside the U.S. and was paid for in U.S. dollars.
Looking ahead, the company’s share price could experience solid gains in 2016 on the heels of an improving housing market. Housing starts to continue to improve. And there is plenty of room for additional long-term growth.
For a company that reported increased sales when the housing market was depressed, now that it is showing signs of renewed strength, Williams-Sonoma should be able to increase sales even further.
Starbucks Corporation (NASDAQ:SBUX)
It’s as if Black Monday never happened. The world’s number one specialty coffee retailer’s share price is up 43% year-to-date. And has erased all black Monday losses.
That optimism might be coming from the company’s record third-quarter revenue and earnings results. Despite the weak global economy and underwhelming economic outlook, Starbucks Corporation (NASDAQ:SBUX) reported record third-quarter revenue of $4.9 billion, an 18% increase over the $4.15 billion recorded in the third quarter of 2014. The increase was driven by the acquisition of Starbucks Japan, a seven percent increase in global comparable store sales, and the opening of 1,592 net new stores over the past 12 months. (Source: Starbucks.com, July 23, 2015.)
Third-quarter EPS increased 21% year-over- year to $0.41 from $0.34 in the same period last year. For the remainder of 2015, Starbucks expects full-year revenue growth of between 16% and 18%. Full-year EPS is expected to be in the range of $1.77 to $1.78.
In 2016, Starbucks will continue to expand; including opening stores in South Africa and turning more of its cafes into destinations for beer and wine lovers.
Carnival Corporation (NYSE:CCL)
Carnival Corporation (NYSE:CCL) is a global cruise company and one of the largest vacation companies in the world, operating a fleet of over 100 ships. Carnival Corporation brands include: Carnival Cruise Line, Holland America Line, Princess Cruises, Seabourn, P&O Cruises, and Cunard.
With 10,000 Baby Boomers retiring each and every day for the next 18 years, the open seas will continue to be a popular vacation destination for years to come. The company’s share price is up an impressive 12.1% year-to-date and an even more impressive 27.8% over the last 12 months.
In September, Carnival reported its strongest quarterly non-GAAP performance on record. The company reported third-quarter non-GAAP net income of $1.4 billion, or $1.75 per diluted share compared to non-GAAP net income for the third quarter of 2014 of $1.2 billion, or $1.58 per diluted share. Revenues for the third quarter of 2015 were $4.9 billion, in line with the prior year. (Source: carnival.com, September 22, 2015.)
Based on the strength of the third quarter, the company has increased its full-year 2015 non-GAAP diluted EPS guidance to be in the range of $2.56 to $2.60, better than both the June guidance range of $2.35 to $2.50 and 2014 non-GAAP diluted earnings of $1.93 per share.
Despite the solid numbers, shares fell as investors digested fourth-quarter earnings guidance of between $0.35 and $0.40 per share; below estimates of $.046 per share. At a time where investors have historically been rewarding companies for not losing as much as they thought they would, this presents an interesting long-term opportunity.