Consumer discretionary stocks can capture the momentum of an improving economy. In good times, money flows into this sector as retailers, media companies and automotive manufacturers benefit from increased spending by consumers with more disposable income. In turn, investors are rewarded with rising share prices and dividends. Yet during a more uncertain economic environment – such as the one we are in now – the sector can be tricky to navigate, so we asked three investment professionals for their top picks.
Lorne Zeiler, portfolio manager with TriDelta Financial in Toronto
- L Brands Inc. (LB-N)
- Last close: $70.03 (U.S.)
- Dividend yield: 3.43 per cent
Based in Columbus, Ohio, this retailer owns Victoria's Secret and Bath and Body Works – two chains with global reach and leaders in their respective retail categories. "Both brands have strong customer loyalty, providing the company with pricing power and ability to maintain its strong margins," Mr. Zeiler says. Benefiting from an improving environment in the United States, the company is also expanding rapidly into emerging markets, building its revenue overseas while increasing efficiencies in existing stores in North America and Europe to improve margins. Also of note, L Brands has "a history of dividend growth and trades at a reasonable valuation to its peers," he says.
- Tupperware Brands Corp. (TUP-N)
- Last close: $55.49 (U.S.)
- Dividend yield: 4.90 per cent
The world's largest direct seller of plastic storage containers and cosmetics, the company has consistently strong sales in mature markets such as North America and Europe. Where the company's real growth lies, however, is in emerging markets such as China, Brazil, Argentina and South Africa. "Tupperware offers a high dividend for yield-hungry investors and trades at an attractive multiple of less than 14 times forecasted earnings," Mr. Zeiler says. A strong U.S. dollar did negatively affect earnings in 2015 because of Tupperware's exposure to foreign markets where, despite increased sales, revenue was lower when converted back to dollars. "This headwind may now be a positive as Tupperware recently increased its earnings per share estimate for 2016 by 5 per cent solely based on the decline in the U.S. dollar."
Diana Orlic, vice-president with Orlic Harding Cooke Wealth Management Group-Richardson GMP in Burlington, Ont.
- Cineplex Inc. (CGX-T)
- Last close: $49.72 (Canadian)
- Dividend yield: 3.14 per cent
Despite a challenging economic environment, the media and entertainment company has been able to increase its sales. While its share price was more expensive a year ago, earnings have been growing quickly since early 2015. "It is still a bit expensive relative to its long-term history and the broader market, but the company does deserve a premium," Ms. Orlic says. Recent initiatives, which include reserved seating, licensed venues and a growing number of concession alternatives, should help drive revenues. Blockbusters such as the coming sequels for Avatar and Star Wars – all delivered in 3D – also point to continuing strong demand from consumers.
- Whistler Blackcomb Holdings Inc. (WB-T)
- Last close: $27.50 (Canadian)
- Dividend yield: 3.55 per cent
The lead owner of Canada's top four-season, mountain resort – Whistler Blackcomb – the company is benefiting from a lower Canadian dollar, attracting more U.S. tourists seeking to stretch their money. Moreover, it is also seeing a boost in domestic travellers now choosing Canadian destinations because vacationing abroad has become more costly because of the devalued loonie relative to other currencies. Whistler Blackcomb Holdings has traded at 30 times earnings at points in the past five years, so its future price to earnings ratio of about 25 could serve as an attractive entry point for would-be investors, Ms. Orlic says. As for its downside, any "rapid changes in the dollar can alter the vacation patterns for the consumer," she says. A rising Canadian dollar could result in lower profit for the company as tourists – both Canadian and American – consider options south of the border and elsewhere.
Hardev Bains, president of Lionridge Capital Management in Winnipeg
- Unilever NV ADR (UN-N)
- Last close: $44.66 (U.S.)
- Dividend yield: 3.70 per cent
Mr. Bains says he does not hold any purely consumer discretionary stocks in client portfolios because of their high price relative to earnings and weakening demand in growth regions such as China. "I'd generally not be interested in such companies that are dependent on a single brand, but some have done a good job at building a portfolio of brands at different price points, from true high-end to more affordable lines." A multinational firm based in the Netherlands, Unilever owns popular brands such as Becel margarine and Dove soap. While these fall more into the consumer staples sector, the company also owns Ben and Jerry's Ice Cream and Axe men's care products – both consumer discretionary product lines. The company's strength, Mr. Bains adds, is its diversity of products that allows it to perform steadily in difficult economic conditions and increase its sales during times of consumer optimism.
- Anheuser-Busch InBev SA ADR (BUD-N)
- Last close: 127.26 (U.S.)
- Dividend yield: 3.12 per cent
The global beer and spirits sector has strong fundamentals, and this Belgium-headquartered conglomerate is among the sector's leaders. The world's largest brewer, whose products include high-profile brands such as Budweiser, Beck's and Stella Artois, has "strong distribution and high profitability," he says. Like Unilever, it is Europe-based and subject to currency risk, but this applies to any company that does business in a variety of jurisdictions.
What's important, Mr. Bains says, is it has many popular brands around the world, making it a dominant player in several markets. This helps mute currency volatility while limiting exposure to any particular economy. Still, he says he does not hold the investment in client portfolios because its share price is quite high.