Investing in Top Consumer Discretionary Stocks

When it comes to shopping, there are things that you need and things that are just nice to have. The consumer discretionary sector is in that second category. It includes goods and services that people spend money on when they have a little extra cash available, such as travel, going out to restaurants, or fashion and jewelry.

Unlike consumer staples companies, which make necessities, consumer discretionary stocks tend to do well when the economy is strong and poorly when times are tough. Keep reading to learn about the consumer discretionary sector and some top stocks to consider.

Overview

Understanding consumer discretionary stocks

Consumer discretionary businesses cover several different industries, but all rely on consumers spending money that they don't need to spend.

Consumer discretionary companies include the following types of businesses:

• Makers of furniture, appliances, housewares, and other home furnishings.
• Consumer electronics manufacturers.
• Apparel and luxury goods companies.
• Retailers of various kinds, including department stores, home improvement retailers, electronics retailers, home furnishers, and clothing stores.
• Direct-to-consumer retailers that sell goods by catalog, mail, or via e-commerce.
• Hotel, resort, and casino operators.
• Restaurant companies.
• Cruise operators.

Consumer discretionary stock prices tend to rise and fall with the overall economy, making them cyclical stocks. For example, high interest rates have put pressure on consumer spending and have cooled off the economy, presenting a challenge for consumer discretionary companies, although they're hopeful that interest rate cuts can encourage growth.

Focusing on well-known brands and industry leaders in this sector is generally a formula for success since the best stocks have long been winners for investors. These companies should also be better able to weather a recession and endure a bear market, as they have deeper pockets and brand equity to fall back on.

List of best stocks

Best consumer discretionary stocks in 2024

Several consumer discretionary companies stand out as being among the best in their industries:

1. Nike

1. Nike

Nike has established a dominant position in athletic footwear and apparel, with more than half a century of innovation in making sportswear appealing to a broad consumer audience. The strength of Nike's business model stems from its product innovation, marketing strength, use of endorsements, and tying the success of high-profile athletes to the company's products. The company has a long history of outperforming the S&P 500.

Long after Michael Jordan left the professional basketball court, Air Jordan shoes remain a mainstay of Nike's business. Nike's market share of athletic footwear, recently estimated at 39%, puts it well ahead of international competitors Adidas (ADDYY 1.17%) and Asics (ASCCF 8.03%). With the global sportswear company working to play a bigger role in fast-growing areas such as China, the sky's the limit for Nike's future growth.

Recently, Nike has struggled with upstart competition like On Holding (ONON 0.35%) and Deckers' (DECK 0.96%) Hoka brand, and the company seems to have leaned too hard on the digital and direct channels, overlooking its established wholesale relationships with key partners like Foot Locker (FL -0.41%).

Nike has built a strong digital ecosystem around apps such as SNKRS and the Nike Training Club, but it expects growth to decline in fiscal 2025. Despite those challenges, it's hard to bet against a company that has led its industry. It may take a management change or a strategic refresh, but Nike should recover from its recent woes.

2. Starbucks

2. Starbucks

The coffee company plays a major role in how a large part of the world's population starts its day. By introducing the European cafe concept to the U.S., Starbucks tapped into consumers' urge to treat themselves to affordable luxuries, and its premium beverages now have a loyal following the world over.

Starbucks has struggled recently as low-priced competitors have taken market share in China, and consumer demand has been weak in the U.S. Additionally, the company seems to be suffering operationally as its menu has gotten too bloated, and throughput has slowed, especially for mobile order & pay customers.

In August 2024, the company hired Brian Niccol, who led the turnaround at Chipotle (CMG 0.9%), to be its next CEO, and investors are hopeful that Niccol can bring Starbucks back to steady growth and restore the business to its potential.

As of June 2024, the company had almost 40,000 locations across the globe and it expects to have 55,000 locations by 2030, indicating no shortage of growth opportunities. Beyond its cafes, the company also has a healthy business selling in-store products like bagged coffee and ready-to-drink beverages.

3. McDonald's

3. McDonald's

McDonald's has come a long way from its heyday in the mid-20th century, and the fast-food colossus has worked hard to keep up with the times. Innovations such as digital menus that automatically change throughout the day, automated kiosks for ordering, online and mobile order capabilities, and delivery options are making McDonald's more accessible than ever.

At the same time, the restaurant chain still emphasizes value, which keeps customers coming back for more. Although it's a restaurant chain, the emphasis on value gives it some elements of a consumer staples company. After all, everybody needs to eat, and getting a cheap and convenient meal at McDonald's is easy.

The company also owns much of the real estate that its franchised restaurants occupy, allowing it to collect rent while franchisees do the hard work of running restaurants.

Even in the ever-changing restaurant space, McDonald's has found a way to stay relevant, though, like much of the consumer discretionary sector, sales have been weak in recent quarters.

Investors also like McDonald's for its consistent dividend payments. It has increased payments to shareholders each year since the mid-1970s, making the company a Dividend King. With a payout ratio of around 60% of earnings, McDonald's can comfortably maintain its dividend.

4. TJX Companies

4. TJX Companies

Off-price retail giant TJX Companies has found success in apparel and home goods with a business model that's not easily replicated online. The parent company of TJ Maxx, Marshall's, and Home Goods obtains discounted brand-name merchandise through close-out sales, manufacturer errors, and order cancellations and then sells the merchandise at 20% to 60% discounts.

The company's business has generated wide profit margins and solid growth over the years. It plans to expand to more than 6,000 stores globally, up from about 4,900 today.

TJX is also one of the rare discretionary retailers that has delivered solid growth in 2024, helped by its off-price model. Revenue rose 6% to $25.9 billion in the first half of 2024, and earnings per share jumped 17% to $1.89, showing the versatility and strength of the company's business model.

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5. The Walt Disney Company

5. The Walt Disney Company

This household name in family entertainment has been a staple of U.S. pop culture for generations. The company’s theme parks and animated movies are popular everywhere. Today, the company also owns ABC, ESPN, Pixar, Marvel, Star Wars, and Hulu, and it acquired a vast array of assets from Fox in a 2019 deal.

Disney has a number of competitive strengths, including an unrivaled trove of intellectual property and a business model that enables successful movies such as Frozen to be spun into multiple business lines, including theme park rides, toys, consumer products, and even live entertainment.

Disney has restructured its entertainment business to make Disney+ its centerpiece, although investors now seem concerned about slowing growth at the streaming business as the company has cut back on costs in streaming in order to deliver a profit.

Disney stock has underperformed for several years now, but the components are there for success if it can complete the transition to streaming. The company plans to launch a streaming version of the flagship ESPN network in the fall of 2025, which could unleash significant profit growth.