The first half of this year turned out to be the worst for Wall Street in more than 50 years. The 40-year high inflation owing to the complete devastation of the global supply-chain system and shortage of manpower, a higher interest rate regime and tight monetary control by the Fed, concerns regarding the U.S. economic slowdown and a possible recession in the near term were the primary reasons for the extreme volatility in the stock markets.
Except the energy sector, all other sectors suffered mighty blows in the first half. The consumer discretionary sector suffered the most. However, we have selected five stocks with a favorable Zacks Rank from this sector that have the potential to provide good returns in the second half.
These are Marriott International Inc. MAR, MGM Resorts International MGM, Wyndham Hotels & Resorts Inc. WH, Nexstar Media Group Inc. NXST and H&R Block Inc. HRB.
Consumer Discretionary Sector Tumbles YTD
The consumer discretionary sector comprises businesses that sell goods and services, which are considered non-essential by consumers. These are the products that consumers can avoid without any major consequences to their well-being. In fact, these goods are desirable only if the available income of an individual is sufficient to purchase them.
Structurally, the consumer discretionary sector is growth-oriented. Share prices of these companies grow over a long time. Consequently, a higher market interest rate is detrimental to this sector.
The yield on the benchmark U.S.10-Year Treasury Note is hovering around 3%. A higher risk-free interest rate means a higher discount rate, which will decrease the net present value of future returns, especially for consumer discretionary stocks.
The Fed terminated the monthly $120 billion bond-buy program in March and has started shrinking the size of its $9 trillion balance sheet since June. The central bank raised the benchmark interest rate from 0-0.25% to 1.50-1.75% in June. Fed Chairman Jerome Powell has already indicated that another rate hike of 75 basis points will be implemented in July.
The Consumer Discretionary Select Sector SPDR XLY — one of the 11 broad sectors of the market’s benchmark S&P 500 Index —tumbled 32.5% in the first half of 2022, the most among all S&P 500 sectors. The index itself has dropped 19.3% year to date.
Our Top Picks
We have narrowed our search to five consumer discretionary stocks. These stocks have solid potential for the rest of 2022 and have seen positive earnings estimate revisions in the past 60 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
H&R Block is well poised to gain from its five-year strategy known as Block Horizons. HRB is expected to deliver sustainable revenues, operating profit growth and healthy returns on investments, while maintaining a strong balance sheet and liquidity position in the foreseeable future.
The main drivers of H&R Block’s performance pos- pandemic will be the digital enablement of business, client addition and retention in both Assisted and DIY, greater usage of AI, along with machine learning for product improvement and expansion in small businesses.
Zacks Rank #1 H&R Block has an expected earnings growth rate of 8.4% for the current fiscal year (ending June 2023). The Zacks Consensus Estimate for the current fiscal year has improved 17.4% over the past 60 days.
MGM Resorts is benefiting from pent-up consumer demand, high domestic casino spending and strong international leisure trends. Sports betting and iGaming continue to be major growth drivers for the company. MGM is optimistic regarding BetMGM operations as it anticipates revenue contributions of more than $1.3 billion in 2022.
Also, emphasis on monetizing its real estate assets and boosting MGM Resorts’ domestic cash position bode well. MGM intends to invest more than $2 billion into its properties to boost customer experiences and services. This and the focus on international expansion are likely to drive growth in the upcoming periods.
Zacks Rank #1 MGM Resorts has an expected earnings growth rate of more than 100% for the current fiscal year. The Zacks Consensus Estimate for the current year has improved 17.5% over the past 30 days.
Nexstar Media owns, operates, programs or provides sales and other services to television stations in the states of Illinois, Indiana, Maryland, Missouri, Montana, Texas, Pennsylvania, Louisiana, Arkansas, Alabama and New York. NXST’s television station group includes the affiliates of NBC, CBS, ABC, FOX and UPN.
Zacks Rank #1 Nexstar Media has an expected earnings growth rate of 36.5% for the current year. The Zacks Consensus Estimate for the current year has improved 5.4% over the past 60 days.
Marriott is benefiting from its focus on expansion initiatives, digital innovation and the loyalty program. MAR is gaining from the reopening of the international borders and leniency in travel restrictions.
Marriott is consistently trying to expand its worldwide presence and capitalize on the demand for hotels in the international markets. The U.S. and global economies have reopened to a great extent as new coronavirus cases have dropped considerably. Several countries are gradually removing travel restrictions. MAR will be a major gainer of the economy’s reopening.
Zacks Rank #2 Marriott has an expected earnings growth rate of 87.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the past 30 days.
Wyndham operates as a hotel franchisor primarily in Canada, Mexico, Colombia, Ecuador, Turkey, Germany, the UK, the Caribbean and Margarita Island in Venezuela. WH operates through the Hotel Franchising and Hotel Management segments.
The Hotel Franchising segment licenses its lodging brands and provides related services to third-party hotel owners and others. The Hotel Management segment provides hotel management services for full-service and limited-service hotels.
Zacks Rank #2 Wyndham has an expected earnings growth rate of 13% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the past 30 days.
5 Stocks Set to Double
Each was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2021. Previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.