Consumer Discretionary Stocks To Shine In 2020

Tight Labor Markets And Consumer Health Will Drive Growth

With the labor markets as tight as they’ve been in 60 years and the Phase One Trade Deal close to hand the Consumer Discretionary Sector (XLY) is set to shine in 2020. The sector is projected to deliver double-digit EPS growth next year and those estimates are conservative. The Phase One Trade Deal once signed, will be a boost to GDP on a global basis and that in turn will fuel consumer confidence and discretionary spending.

Housing Is The Hottest Sector In Discretionary Spending

The hottest sector for discretionary spending will be in the housing sector. The housing sector, specifically the homebuilding sector (XHB), has seen an acceleration in recent months that point to solid activity next year. The three most telling pieces of data are the Housing Permits, Housing Starts, and Housing Market Index. The Permits figure has risen more than 17% over the last 8 months and is leading the Starts figure higher as it advances. The Housing Market Index, a measure of builder confidence, hit a 20-year high as traffic, sales, and outlook all increased.

Pulte Group (PHM) is American’s largest homebuilder and the best positioned to reap profits in 2020. The company has been in operation since the early ‘50s and builds a wide variety of housing options including single-family detached, duplexes, townhomes and condominiums. As of the last report, the company controlled 150,000 lots directly or through lease options guaranteeing many years of building opportunity.

Looking to next year, the analysts are expecting Pulte to produce 9.0% EPS growth but this estimate is to low. The company recently announced 3Q results and revealed a 13% increase in new orders. The jump in new orders was driven by lower interest rates and, because the FOMC says there will be no rate hikes for at least a year, we can expect the momentum to continue.

On a technical basis, shares of Pulte Group have been rallying all year and up more than 50% in that time. The stock looks like it is going to retest the all-time high in 2020, the all-time high set before the Housing Bubble Burst, and new all-time highs are possible.

Home Improvement Outlook Improves Along With The Homebuilders

Other beneficiaries of strength within the labor and housing markets are the home improvement retailers, Home Depot (HD) and Lowe’s (LOW). Where Home Depot has been the top-choice for year, Lowe’s is quickly overshadowing it from the risk-reward perspective. Home Depot, in its 3Q report, only reaffirmed its guidance for the year while Lowe’s management raised theirs. Shares of Lowe’s broke out to a new high on the news.

Lowe’s sees its total revenue rising about 2.0% next year, not a robust figure by any means, but there are other reasons to like this stock. The company has been working hard at improving profitability and that is seen in the margin and EPS guidance. Margins are expected to expand by 300 basis points and drive profit growth in 2020. The outlook for profit growth in 2020 is robust, about 17% from this year.

Aside from Lowe’s outlook for growth is its dividend. The company is a Dividend Aristocrat with over 50 years of distribution increases. At today’s share prices the stock yields about 1.85%, low but offset by the payout ratio (less than 40%) and 5-year average growth rate (above 20%). When Lowe’s raises its dividend next year and it will, the increase should be substantial and that will help drive capital gains in the years to come.

McDonald’s, Steady Growth And Great Dividend

McDonald’s (MCD) shares entered a correction this year due to some sluggishness in restaurant spending and compounded by the “chicken sandwich wars”. The battle between Popeye’s, Wendy’s, and Chic-Fil-A took a lot of attention away from this iconic burger brand but did little to hamper its outlook for future growth, or its ability to pay the dividend. Looking to next year McDonald’s is expecting 8-10% EPS growth.

McDonald’s has a chicken sandwich too but it doesn’t compare well with Chic-Fil-A and the new Popey’s sandwich. That’s why the company is working on a new version that will directly compete in the “chicken sandwich wars”. After a test of the new product, McDonald’s said the offering was a “terrific upgrade” to its current chicken offering.

Telsey analyst Bob Derrington said this about the sandwich in a note to investors. "We believe MCD's new Crispy Chicken Sandwich and Biscuit will usher in a successful new U.S. lineup of better-quality chicken in 2020 and 2021,"

When it comes to the dividend McDonald’s is another Dividend Aristocrat, this time with more than 40 years of distribution increases under its belt. The payout ratio is a bit high at 63% but still manageable so no worries there. On a technical basis, the stock is down more than 10% from its most recent high and presenting a buying opportunity for long-term investors.