Consumer Discretionary Sector investing

Welcome back to this week’s edition of the stock pick of the week.  This week’s choice is basically any stock in the consumer discretionary sector of the US economy.  What is the consumer discretionary sector you may ask?  It’s basically any consumer good that isn’t required to live.  That is, these stocks are marketed to the US consumer and see ups when there’s free cash lying around, and drops when consumers are keeping tight wallets.

The first major point behind this investment thesis is, like always, oil.  With lower gas prices, consumers are willing to spend much more on pointless things that they honestly don’t need.  This makes any consumer discretionary company fill with joy.  However, these increases in sales are typically not noticed for a while and there is a delay in the spike in sales.  With earning season coming up, many companies are filing their 10Q earning report (The report that releases how much money/profit the company made during the first quarter of 2015).  I expect the vast majority of consumer discretionary stocks to exceed expectations and analyst projections, assuming there is nothing that fundamentally has gone wrong with the company during this past quarter.

Another major driver behind this investment is the continued decrease in unemployment and overall health of the US economy.  Within the United States we have seen unemployment final reach the Fed’s target of “Full Employment” (The rate at which the economy starts to become hurt by further decreases in unemployment).  We know this because the Fed, as I discussed last week, is finally attempting to pull back in the economy by increasing rates over the next few months.  However, at the current time these rates are not dragging the economy back, therefore the consumer is still able to spend freely.

One note I do have to say about this investment thesis however, is that if one does invest in this sector, it is key that the stock for the most part or completely has sales in the United States.  Due to the relative strength of the US economy compared to the rest of the world, the US dollar is currently worth a fortune in other countries’ currencies, but that makes our exports extremely expensive in other countries.  Hence, a company that is receiving payment in Euro due to having operations in Europe is actually seeing minimal increases in revenue due to the fact that the euros that they pay in that country are worth much less to US centered companies who operate mainly in the US with divisions in Europe.  To put it in perspective, months ago the exchange rate was 1.2 dollars per euro.  The current rate is closer to 1, but overall costs of goods in euros have not changes.  This means US company’s European earnings basically dropped by 16% as a result of simple changes in the currency exchange rate.

The final piece of advise I have for the risk prone, is now would also be the time to invest in a consumer discretionary low market cap, high growth stock.  High growth stocks thrive in a booming economy like we are currently in, and a consumer discretionary focus would amplify this even further.  Therefore a consumer discretionary high growth stock would have the most upside potential at this point in time, but logically also the most downside.

Hopefully this made sense to you guys!  Let me know in the comments if there was anything that I didn’t explain adequately!

Comments

  1. David J Kutz says:

    Hey dude, it all made sense to me, but I’m missing the main point. If I find like $3000 laying around after one of my like 6 brackets comes through for me (take off the last 2 zeroes maybe), what stock would you pick?? Not that it’s realistic, but I’m just curious what stock you’d pick if you had the capital.

  2. Zach Hemler says:

    I’m going to have like 300 meal points left over at the end of this semester that I need to do something with. If I buy enough chips and soda so that I have $200 worth of those assets, what can I do with that? Let me know. I’ll give you a cut.

  3. Made sense to me Ben. The logic behind your argument seems to support what you are saying, and it would make sense that as people have more money to spend they will spend it on dumber and dumber stuff. Also, I like how you brought up the point of Euros being closer to the US dollar now and the prices in Europe not changing. This is a really interesting point that I had never considered before. Maybe I’ll go invest in some Gucci stocks…

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