Summer begins this year on June 21, making it the longest day of the year. As Americans get out this summer to enjoy some time off, there are a number of companies and industries that should benefit from increased consumer spending. That makes investing in consumer stocks a smart play ahead of the summer rally that often occurs.
Which are the top consumer stocks to buy for a summer rally? Consumer discretionary stocks are near the lead, both in terms of earnings growth and when it comes to stock performance.
As of May 22, the top performance by an S&P 500 sector year-to-date is communication services, up 32.3%, followed by technology in second, up 27.6%. In third place is the consumer discretionary sector, up 17.6%.
To figure out the three consumer stocks for summer rally, I’ll look at the holdings of the Consumer Discretionary Select Sector SPDR Fund (NYSEAECA:XLY), a collection of 53 consumer discretionary stocks from the S&P 500.
The weighted average market capitalization of the stocks in the ETF is more than $453 billion, so we’re talking about larger companies.
Here are my three consumer stocks for a summer rally.
Amazon (AMZN)
There isn’t any question that Amazon’s (NASDAQ:AMZN) e-commerce revenues have slowed in recent quarters compared to the pandemic. In Q1 2023, excluding currency, its online stores had a 3% year-over-year revenue increase to $51.1 billion. It revived in Q3 2022 when online store revenues rose 13% YOY. However, before that, you have to go back five quarters to Q2 2021 for double-digit revenue growth.
The good news on the e-commerce front is that growth from its third-party sellers continues to generate 20%+ revenue growth rates. In Q1 2023, they were up 20% to $29.8 billion. In Q2 2021, they were $25.1 billion, so business remains brisk.
Additionally, subscription services revenues are up 27% over the past eight quarters. Amazon’s advertising services revenues jumped 51%, and its Amazon Web Services (AWS) cloud business revenues are up 58%. Until those stop growing, the long-term prospects for Amazon appear bright.
One caveat: Bill Gates believes artificial intelligence (AI) will make Amazon’s e-commerce business obsolete. Maybe not in the near term, but it’s something to remember as an Amazon shareholder.
Chipotle Mexican Grill (CMG)
As friends and family gather this summer, Chipotle Mexican Grill (NYSE:CMG) will be a common meeting place — reasonably healthy food at fair prices. What’s not to like?
Well, there is one thing. Its share price is up 49% YTD and 62% over the past year. Given the threat of a recession in the fall, consumers won’t be eager to spend discretionary income if they even have it. The only possible savior is if the Federal Reserve starts cutting interest rates to pull us out of one.
Until then, however, people will keep visiting Chipotle locations across the country.
Highlights from a solid first quarter include 10.9% comparable restaurant sales growth, a 610 basis point increase in its operating margin to 15.5%, and an 84.2% increase in its adjusted earnings per share (EPS) to $10.50.
It continues to open new locations — 41 in Q1 2023, 34 of which had a Chipotlane drive-thru — with as many as 285 planned for all of 2023.
Its stock isn’t cheap at 6.4x sales, but it looks downright hospitable when you compare it to McDonald’s (NYSE:MCD) at 9.0x sales.
TJX Companies (TJX)
To spend money at places like Chipotle this summer, savvy consumers will go to one or more of the many different banners operated by TJX Companies (NYSE:TJX).
While the discount retailer’s stock hasn’t done much in 2023, it’s down nearly 2%. However, over the past five years, it’s up 76%, more than 23 percentage points higher than the S&P 500.
Analysts generally like its stock. Of the 23 that cover it, 16 rate it either Overweight or an outright Buy with a median target price of $90, 16% higher than where it’s currently trading.
The company reported Q1 2024 results on May 17. Inflationary pressures continue to drive consumers into TJX stores. As a result of higher traffic, its overall same-store sales (SSS) increased by 3% during the quarter, which was at the high end of its guidance. Its Marmaxx stores (T.J. Maxx, Marshalls and Sierra) led the way with 5% SSS growth in the quarter.
On the bottom line, its adjusted EPS was 76 cents, 12% higher than Q1 2023 and four cents higher than analyst expectations. It finished the quarter with 30 additional stores, to 4,865 across all its banners.
For 2024, it expects 2.5% SSS growth at the midpoint of its guidance with $3.54 EPS.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.