While the economy may have bounced back on paper from the COVID-19 disaster, it’s increasingly looking like we’re headed toward a K-shaped recovery. Per Investopedia, this phenomenon refers to a recovery following a recession (or in this case an acute emergency) where “only certain sectors, industries, or areas of the economy recover.” However, this dynamic may open opportunities in terms of consumer cyclical stocks to buy.
Yes, rising inflation and elevated borrowing costs theoretically should crimp consumer demand – and they do. However, not all segments have experienced a prolonged downturn. Further, certain demographics (especially those in higher income brackets) have consistently opened their wallets. That should bode very well for specific consumer cyclical stocks to buy.
In addition, the other, more negative component of the K-shaped recovery can also boost sentiment for retail enterprises. Yes, people are hurting but that also may translate to increased demand for discount specialists. With this mind, below are relevant consumer cyclical stocks to buy.
Costco (COST)
Frankly, Costco (NASDAQ:COST) is one of the most boring ideas you can consider among consumer cyclical stocks to buy. In many ways, it’s a “safe” investment. People don’t just go there to shop for discretionary wants. Instead, because they offer bulk food products and other necessities, there’s a fundamental reason to go through its doors. However, Costco runs tend to be adult playgrounds, which makes it an enticing opportunity.
That’s because you can’t deny the consistency. No, Costco doesn’t generate speculator earnings performances. However, between its fiscal third quarter of 2023 and Q2 2024, the company generated an average earnings per share of roughly $4.04. This print translated to an average earnings surprise – or the magnitude by which actual EPS exceeded the consensus view – of 4.18%.
During the trailing 12 months (TTM), Costco posted net income of $7.17 billion or earnings of $16.14 per share. Revenue reached $253.7 billion during the period. For fiscal 2024, analysts on average believe that EPS could rise to $16.64, an improvement of 17.48% from the prior year. Further, the top line could expand by 7.29% to $259.94 billion.
Amazon (AMZN)
Essentially a pioneer of the e-commerce phenomenon, Amazon (NASDAQ:AMZN) has over the years evolved into a disruptive technology juggernaut. Still, its core business involves facilitating the sales of goods through its online marketplace – and business is good. Indeed, Amazon is a beneficiary of the K-shaped recovery. Yes, many households are struggling but there are those who are thriving.
Increasingly, the more privileged members of society are turning to Amazon for their shopping needs. Government data shows that e-commerce as a percentage of total retail transactions has been on a tear since Q2 2022. The trend might not slow down. By how fast we’re moving, we could soon surpass levels seen during Q2 2020. That was when the world had to shop online.
Amazon is a financial powerhouse, which makes it one of the consumer cyclical stocks to buy. In the TTM period, net income reached $37.68 billion or earnings of $3.58 per share. Revenue landed at $590.74 billion in the cycle. For fiscal 2024, experts anticipate that EPS could rise to $4.63. If so, that would be up almost 60%.
On the top line, sales might see a 13.26% lift to just over $651 billion. It’s difficult to bet against AMZN so I wouldn’t do it.
Chewy (CHWY)
A clear reflection of the K-shaped recovery among consumer cyclical stocks to buy comes from Chewy (NYSE:CHWY). Sort of an Amazon for pets, Chewy is an online retailer of pet food and other pet-related products. Now, Americans love their four-legged friends, I get that. However, it’s not just a sentiment but rather an economic reality.
Despite the ravages of inflation and high borrowing costs, the U.S. pet industry continues to thrive. The latest data from the American Pet Products Association shows that total industry expenditures hit $147 billion last year. So it was always odd to me that CHWY stock was such a poor performer up until recently. Fortunately, the company released some strong earnings results in Q1 and CHWY rebounded.
Since the start of the year, shares have gained over 30%. To be sure, analysts see risks in the near term. Still, because American pet owners have consistently stood by their animals, I think we could see a strong result this year.
On paper, experts are looking for fiscal 2024 EPS to hit 25 cents. If so, that would be a massive 175.33% leap from last year. Also, revenue could hit $11.99 billion, a projected increase of 7.59%.
elf Beauty (ELF)
Another possible beneficiary of the K-shaped recovery is beauty care specialist elf Beauty (NYSE:ELF). Technically speaking, elf is a cosmetics brand so it might not seem like a perfect idea among consumer cyclical stocks to buy. However, the company’s public profile – provided by Google Finance – states that over half of its revenue stems from its website.
The juxtaposition of ELF stock is intriguing. On one hand, a cosmetics firm shouldn’t do well in a period of rising prices and elevated borrowing costs. People are legitimately struggling. On the other hand, the favorable component of the K-shape is performing quite well. They’re socially mobile and they’re going on vacations and having a grand ole time. These folks may be boosting elf’s business.
Indeed, ELF stock gained over 46% since the beginning of the year. Still, there could be even more room to grow over the long run. During the TTM period, the company posted net income of $127.66 million or $2.21 per share. Revenue in the cycle reached $1.02 billion.
For the current fiscal year, experts seek EPS of $3.43, an increase of 55.09%. Further, sales may rise 26.77% to reach $1.3 billion.
TJX Companies (TJX)
One of the well-known brands within the broad consumer cyclical space, TJX Companies (NYSE:TJX) primarily focuses on apparel retail. Together with its subsidiaries, TJX operates as an off-price apparel and home fashions retailer in the U.S., Canada, Europe and Australia. Fundamentally, it enjoys several relevant avenues.
First, the home-buying surge during the early days of the Covid-19 pandemic should benefit the company’s home goods unit. Presumably, a great many first-time homebuyers won’t have too many funds available to spend. So, a discount retailer represents an ideal choice. Second, the apparel line could see increased demand as society normalizes.
For instance, if return-to-office mandates accelerate, that could translate to increased demand for business casual attire. Again, that may benefit TJX. Encouragingly, the company’s average earnings surprise has come out to a very decent 7.55%.
For the current fiscal year, experts see a 7% rise in EPS to $4.13. On the top line, sales could rise 3.3% to $56.02 billion. The company also offers a forward yield of 1.36%, making it a conservative and simultaneously relevant idea among consumer cyclical stocks to buy.
Darden Restaurants (DRI)
When investors think about consumer cyclical stocks to buy, they’re generally thinking about discretionary retailers. While that’s a big part of the narrative, it doesn’t always have to involve buying stuff. Consumer cyclical also includes the restaurant industry, which brings up Darden Restaurants (NYSE:DRI). Mainly, I’d say that Darden is known for its Olive Garden label.
However, what makes the company intriguing is that last year, it completed its acquisition of Ruth’s Hospitality Group. Under the deal, Darden now controls Ruth’s Chris Steak House, a premium restaurant. Therefore, Darden may be one of the most balanced ideas for consumer cyclical stocks to buy. For those who are benefitting from the K-shaped recovery, you have Ruth’s Chris.
On the other hand, those on the downward sloping segment of the K-shape will likely go to Olive Garden. I’m not casting aspersions – just calling the situation how it is. Whatever the case, Darden has been performing well, with an average earnings surprise of 2.55% in the past four quarters.
During the TTM period, Darden posted net income of $1.03 billion or $8.53 per share. Revenue hit $11.39 billion. For the current fiscal year, analysts see EPS rising 7.3% to $9.53. Revenue may bump up 3.9% to hit $11.83 billion.
Five Below (FIVE)
If there’s one name on this list of consumer cyclical stocks to buy that’s catered to the negative side of the K-shaped recovery, it’s Five Below (NASDAQ:FIVE). Before getting into the granularity, on a broader level, Five offers a compelling business model. It’s a discount retailer but unlike the pure-play dollar stores, FIVE features products that go up to $5, hence the name.
Also, the company provides a selection of items that range between $6 to $25. So, it’s not just the down-on-their-luck folks that shop at Five; many others – especially those looking for a bargain – do as well. Unfortunately for investors, relevance alone hasn’t been enough. Since the start of the year, FIVE stock dropped more than 49% of equity value.
Against bottom-line targets, the company missed analysts’ expectations in the last two quarters. In the TTM period, net income came out to $295.1 million or $5.31 per share. Revenue reached $3.64 billion. For the year, experts are now seeing a 3.5% erosion in EPS to $5.22.
The saving grace may come from the top line. Analysts believe sales may rise 8.1% to $3.85 billion. It’s a falling knife yet I got to believe the company will make a turnaround.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.