Consumer discretionary goods are those that people desire but do not necessarily need and can forgo if their financial situation requires it. The demand for these goods is more sensitive to economic conditions than consumer staples, which are essential products that people need regardless of financial circumstances.
However, we think there are opportunities to be found in this sector as the economy rebounds. Hence, investors could consider buying fundamentally sound consumer discretionary stocks, such as The Home Depot, Inc. (HD), Sony Group Corporation (SONY), and NVR, Inc. (NVR).
The global economy is rebounding currently as inflationary pressures continue to ease. The International Monetary Fund (IMF) expects the global economy to grow 3.2% this year and 3.3% in the next year, as global inflation is anticipated to slow to 5.9% this year from 6.7% last year, on track for a soft landing.
Against this backdrop, the growing demand for home remodeling, the rising adoption of smart home technology, and the increasing need for energy-efficient living spaces are driving growth in the global home improvement services market, which is expected to grow at a CAGR of 4% until 2032.
In addition, the recent increase in demand for visually appealing home interiors and exteriors can be attributed to shifting homeowner preferences and higher disposable incomes. This trend has resulted in changes in the materials and products used in residential construction and interior design.
Furthermore, The U.S. residential construction market is forecast to grow at a CAGR of 4.5% by 2028. Rising household formation rates drive the market's growth, supportive government policies and incentives, economic growth, and increased disposable income in the United States.
Considering these encouraging trends, let’s take a look at the fundamentals of the three best consumer discretionary industry stocks.
Stock #3: The Home Depot, Inc. (HD)
HD is a home improvement retailer in the United States and internationally. It sells various building materials, home improvement products, lawn and garden products, and décor products, as well as facilities maintenance, repair, and operations products.
On June 18, 2024, HD completed the acquisition of SRS Distribution, Inc. for a total enterprise value of approximately $18.25 billion. SRS is a leading residential specialty trade distribution company across several verticals serving the professional roofer, landscaper, and pool contractor.
HD’s trailing-12-month EBITDA margin of 16.14% is 42% higher than the industry average of 11.37%. Also, the stock’s trailing-12-month net income margin and EBIT margin of 9.79% and 13.97% are 101.3% and 81% higher than the industry averages of 4.87% and 7.74%, respectively.
For the fiscal first quarter ended April 28, 2024, HD reported net sales of $26.42 billion. Its gross profit came in at $12.43 billion. Also, the company’s net earnings were reported at $3.60 billion and $3.64 per share. Additionally, as of April 28, 2024, its cash and cash equivalents were $4.26 billion, compared to $1.26 billion as of April 30, 2023.
Analysts expect HD’s revenue for the fiscal year ending January 2025 to increase 1.5% year-over-year to $154.99 billion. For the same year, Street expects its EPS to increase marginally year-over-year to $15.26. The company surpassed its EPS estimates in each of the trailing four quarters, which is promising.
HD’s stock has soared 10.2% over the past three months to close the last trading session at $369.12.
HD’s POWR Ratings reflect its outlook. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a B grade for Quality. It is ranked #24 in the 59-stock B-rated Home Improvement & Goods industry.
Beyond what is stated above, we’ve also rated HD for Growth, Momentum, Sentiment, Stability, and Value. Get all HD ratings here.
Stock #2: Sony Group Corporation (SONY)
Headquartered in Tokyo, Japan, SONY designs, develops, produces, and sells electronic equipment, instruments, and devices for the consumer, professional, and industrial markets.
SONY’s trailing-12-month net income margin of 7.45% is 53.2% higher than the industry average of 4.87%. Its trailing-12-month EBIT margin of 9.09% is 17.4% higher than the 7.74% industry average. Also, the stock’s trailing-12-month EBITDA margin of 11.89% is 4.6% higher than the 11.37% industry average.
During the fiscal year, which ended March 31, 2024, SONY’s total sales and financial services revenue increased 18.7% year-over-year to ¥13.02 trillion ($82.41 billion). The company reported a net income and net income per share of ¥980.49 billion ($6.21 million) and ¥785.68, respectively.
Analysts expect SONY’s revenue to increase 4.4% year-over-year to $19.51 billion, accompanied by a projected 11.3% year-over-year rise in EPS to $1.29 for the fiscal quarter ending September 2024. Moreover, the company has surpassed consensus EPS estimates in three of the trailing four quarters, which is impressive.
Shares of SONY have gained 16.9% over the past month to close the last trading session at $96.13.
SONY’s POWR Ratings reflect bright prospects. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.
SONY has a B grade for Sentiment. It is ranked #2 in the Entertainment - Media Producers industry.
In addition to the POWR Ratings highlighted above, one can access SONY’s ratings for Growth, Value, Momentum, Quality, and Stability here.
Stock #1: NVR, Inc. (NVR)
NVR is a homebuilder in the United States. The company operates through the Homebuilding and Mortgage Banking segments. NVR constructs and sells single-family detached homes, townhomes, and condominium buildings under the Ryan Homes, NVHomes, and Heartland Homes names.
NVR’s trailing-12-month levered FCF margin of 9.82% is 80.2% higher than the industry average of 5.45%. Also, the stock’s trailing-12-month asset turnover ratio of 1.56x is 57.2% higher than the 0.99x industry average.
For the fiscal first quarter ended March 31, 2024, NVR’s revenue increased 7.5% year-over-year to $2.29 billion. Its net income rose 14.5% year-over-year to $394.27 million. Moreover, the company’s earnings per share increased 16.5% year-over-year to $116.41.
Street expects NVR’s revenue for the fiscal second quarter ended June 2024 to increase 11.5% year-over-year to $2.55 billion. Its EPS for the same quarter grew 4% year-over-year to $121.21. Moreover, the company surpassed its EPS estimates in each of the trailing four quarters, which is promising.
Over the past three months, the stock has gained 11% to close the last trading session at $8,500.
NVR’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
NVR has a B grade for Momentum, Sentiment, and Quality. It is ranked #6 in the B-rated Homebuilders industry.
Click here to access the additional NVR ratings (Growth, Value, and Stability).
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HD shares were trading at $373.15 per share on Wednesday afternoon, up $4.03 (+1.09%). Year-to-date, HD has gained 9.07%, versus a 18.03% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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