As 2022 goes into full swing, it stands to reason that as the pandemic doesn’t impose quite the burden that it once did, consumer discretionary spending will tick upward. After all, nonessential products and services will come into vogue again, right? (Aren’t we beyond the need for just toilet paper?)
The consumer discretionary sector benefits when people feel more free to spend money or feel they have more money to spend. So, what are the types of products and companies that show promise in 2022 and how should you invest?
Let’s find out.
What is the Consumer Discretionary Sector?
First of all, what is the consumer discretionary sector? The consumer discretionary sector is made up of businesses that sell products and services deemed “nonessential” — those that consumers don’t have to buy. They’re different from consumer staples — that sector comprises products like food, beverages and yes, toilet paper — things that consumers tend to buy no matter how well or how poorly the economy is doing.
Here’s an example: You don’t really need diamond earrings or brand new vehicles — you can probably get along with your old gold studs or your used vehicle if you absolutely needed to.
What Makes up the Consumer Discretionary Sector?
Within the consumer discretionary sector are various groupings of companies for which demand can zip down quickly when consumers don’t need them. Here’s a quick list of industries that comprise the sector: Autos, the distributor industry, diversified consumer services, hotels and restaurants, household durables, internet and catalog retail, leisure products, media, retail and luxury goods (including apparel). Let’s take a look at a slice of options within the sector, plus a stock or two to consider for your own portfolio.
The auto industry, a very cyclical industry, includes the design, manufacture, repair and maintenance of automobiles. What does that mean? You got it — profit margins with high volatility, not to mention the cost variation even due to raw materials like copper and steel.
Ambarella Inc., headquartered in Santa Clara, California, develops and sells video compression, image processing and computer vision solutions. The company creates and sells computers and software that goes toward security cameras, automotive cameras, industrial and robotic applications, and consumer applications. You’ll find Ambarella applications in Tesla’s (NASDAQ: TSLA) self-driving system. Ambarella showed third-quarter gains of fiscal 2021 of $92.2 million, up 64% from $56.1 million in the same period in fiscal 2020.
Hotels and Restaurants
When it comes to hotels and restaurants, you can bet this is one of the first things to go when the economy stagnates. Though it’s true that hotel operators have been ready for a long time for a slow, steady recovery after COVID-19 that will likely last longer than after the Great Recession, you can still find some diamonds in the rough, particularly with some corrections heading down the pipeline.
The ONE Group Hospitality Inc., based in Denver, Colorado, develops, owns, and manages restaurants and lounges such as STK, Kona Grill and ONE Hospitality. The company operates other brands and venue concepts like ANGEL, Bagatelle, Heliot, Hideout, Marconi, and Radio.
Financial highlights for the third quarter compared to the same period last year included GAAP revenue increase 81.6% to $71.9 million from $39.6 million, GAAP net income of $11.7 million or $0.34 net income per share, compared to GAAP net loss of $0.9 million in 2020.
At first glance, it might not be readily apparent what household durables are. Think of them as infrequently purchased products, like lawn care equipment, furniture, appliances, and other types of products that might go by the wayside during a bear market.
Purple Innovation Inc., headquartered in Lehi, Utah, designs and makes comfort technology products like mattresses, bed pillows, seat cushions, mattress protectors and bamboo sheets.
Manufacturing backlog slowed Purple’s production, which had a net revenue decrease of 8.7% to $170.8 million compared to 2020 and increased 45.5% compared to 2019. Wholesale revenue increased 9.6% over 2020 and 17.1% over 2019 and direct-to-consumer revenue decreased 15.9%. Gross profit was 35.8% compared to 47.2% in 2020 and 45.0% in 2019. However, the company will ramp to 270 new wholesale retail doors and increase its footprint.
Internet and Catalog Retail
Naturally, this section of consumer discretionary grew as the internet boomed during the pandemic. It includes mail order and door-to-door retailers, TV home shopping retailers, and internet service companies. These companies don’t offer brick-and-mortar locations.
Booking Holdings Inc., offers travel and restaurant online reservation and related services. It connects consumers with providers of travel services across the world, including hotels, bed and breakfasts, hostels, apartments, vacation rentals, and other properties through Booking.com, priceline.com, agoda.com, KAYAK, Rentalcars.com, and OpenTable Inc.
Booking Holdings’ total revenues for Q3 2021 were $4.7 billion, a 77% increase from the prior-year quarter. Net income was $769 million, a 4% decrease from the prior-year quarter. Non-GAAP net income in the 3rd quarter of 2021 was $1.6 billion.
Leisure products refer to various types of leisure activities — sports, outdoor activities (such as camping equipment) and toys, for example.
Winnebago Industries Inc., headquartered in Forest City, Iowa, designs, develops and sells recreation products, including its Grand Design towables, Winnebago towables, Winnebago motorhomes, Newmar motorhomes, Chris-Craft marine and Winnebago specialty vehicles.
Revenues for the fiscal 2022 first quarter at the end of November were a record $1.2 billion, an increase of 45.7% compared to $793.1 million for the Fiscal 2021 period. This represented an organic growth rate of 37.5% over the prior year period due to strong consumer demand and pricing increases related to material costs.
Ready to Pursue the Consumer Discretionary Sector?
While you might have to cherry-pick through the right consumer discretionary stocks for your portfolio, it’s worth considering this sector for buys and highs in 2022.