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ASX consumer discretionary stocks have fared terribly over the last 12 months. 4-decade high inflation and rapidly rising interest rates have meant they have become more discretionary than ever…whilst consumer staples become more important than ever.
We’re not going to argue the general sell-off was overdone, even if some individual stocks were. What we’re going to argue is that the worst of the sell-off is over now and it could be time to consider some of them.
Economic data suggests it might be time to consider ASX consumer discretionary stocks again
We were intrigued by economic data released this week. Australia’s Big 4 banks release card tracking data and Westpac does so every week. Its Card Tracker Index is now up 6% from mid-June and has risen for 2 weeks in a row. As the bank noted, it has been over 15 weeks since the last RBA
gut punch rate hike and consumers are gradually absorbing increased costs.
Also intriguing was inflation data from the Australian Bureau of Statistics. Headline inflation came in at 5.2%, which was actually higher than one month earlier. But when volatile items are removed, the annual rise was 5.5%, down from 5.8% a month earlier.
Some economists have argued this is a case for the RBA to increase rates again when it meets next Tuesday. The fact that another rate hike might be needed shows the economy is not just strong, but too strong that further tightening policy is needed.
What stocks might benefit?
With FY23 reporting season over and the Christmas season approaching, it might be time to look at consumer discretionary stocks again. We think the key is to look for market leaders – companies with a strong market share and little competition. So stocks like Baby Bunting (ASX:BBN) might still not be worth your while given the competition it has from Target, K-Mart and Big W (among others).
We also would be cautious about companies that had booms during the pandemic and had customers unlikely to return any time soon. Think of furniture companies – unless you have bought a dud product, you’re unlikely to go shopping for it ever year. It would be a different story for electronics companies like JB Hi-Fi, where you can’t expect a laptop or phone to last a decade or two!
The bottom line is that some consumer discretionary stocks might be worth considering now that the cost of living crisis appears to be mitigating. And we thought we’d share with you our 5 favourite stocks in this sector.
1. Wesfarmers (ASX:WES)
Yes, this is a no-brainer and likely to be a safe bet no matter where inflation goes. Wesfarmers is a $55bn conglomerate that has interests in retail as well as industrials, chemical and fertilisers. It owns Bunnings, Officeworks, K-Mart, Target and Priceline, among others. Wesfarmers has not reported demand slowing, although margins have been hit by labour costs and lower productivity. Ultimately, it may still emerge at the end of FY24 better off than many of its smaller peers because it is a price maker rather than a price taker.
2. JB Hi-Fi (ASX:JBH)
We alluded to this company just above, noting that while furniture lasts for several years, electronic devices don’t and so those who bought during lockdowns couldn’t wait too long to come back. In FY23, total sales increased 4.3% to $9.6bn and its net profit was down 3.7% to $524.6m. But both figures were up 36% and 110% since COVID-19. We expect the company’s growth to continue and for it to be a good yielding dividend payer – it yielded over 6% last year.
3. Dominos (ASX:DMP)
Dominos appears to have bottomed out but still has a long way to go in order to catch up to where it was back in mid-2021 when locked down consumers were ordering pizza en-masse. Although the company’s FY23 result was a step backwards, the company reported consumers were returning in the dying stages of the year as it undertook initiatives such as the My Dominos Box that aimed to provide value for money.
4. Breville (ASX:BRG)
Breville is a premium kitchen appliances business. It is discretionary, but arguably less than others. Think about it: If you drink coffee and use a coffee machine and it beaks, you’re not going to wait to get a new one. It has a terrific long term record of sales growth and revenue expansion, it has terrific supply chains and has successfully unwound excess inventory it had during the pandemic. It grew its revenue and profit by 4% during FY23, meeting the top end of its guidance. Granted, it has not yet given guidance for FY24 but consensus estimates expect 8% growth to $1.6bn as well as for 10% profit growth.
5. Viva Leisure (ASX:VVA)
This company operates fitness centres and is the market leader in Australia. It has been an extremely unlucky company with (brief) pandemic shutdowns and a slow and steady trek back to pre-COVID levels. But technically, shares might finally be headed in the right dirdction. And its results were very strong with its revenue increasing 44% to $141m and its bottom line turning from a $12.1m loss to a $3.4m profit. It also grew its membership to over 340,000 in 12 months.
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