Tech may have led the market so far this year, but there’s one sector that’s not too far behind.
Consumer discretionary is the second-best performing sector so far in 2020 as shoppers stuck at home amid the coronavirus pandemic have fueled a surge in online spending, pushing names like Etsy (NASDAQ: ETSY) and Amazon (NASDAQ: AMZN) far higher.
The XLY Consumer Discretionary Sector SPDR is up nearly 21% so far this year, and one expert says the group should keep heading higher.
“In recent months, we’ve seen leadership brough into very key sectors like consumer discretionary and industrials as well which we see signs of longer-term green shoots and cyclicality which we think should be support for the bull cycle and additional upside,” Oppenheimer head of technical analysis Ari Wald said this week, adding that he likes one name in the sector in particular.
“The point I want to stress is that this is a very broad-base move across the sector, both big and small stocks, but… to call out one name within this broad list, that would be homebuilder Lennar (NYSE: LEN) which is breaking through 15-year resistance dating back to the year 2005,” Wald said. “We see more upside there in Lennar.”
New Street Advisors founder Delano Saporu has his eye on two other stocks in the consumer discretionary space: Amazon and Nike (NYSE: NKE).
Saporu said Amazon’s upward trajectory can “definitely” continue. “We’re coming up on a holiday season where a lot of people hopefully have some things on their shopping list,” Saporu said. “We’re going to see a lot of people looking to put money to work after they take care of their basic necessities.”
Needham analyst Rick Patel recently surveyed several hundred consumers, and concluded in a note earlier this month that, “digital channels will remain strong despite the vast majority of stores now being open since early summer,” and this should help outlets like Amazon this holiday season.
“In our view, loyalty to the online channel continues to increase at the expense of traditional stores, and this should be the biggest benefit to those that offer broad assortments, the most convenience, and a differentiated experience, particularly Amazon,” Patel wrote.
In total, more than 70% of the respondents in the survey said they “have a preference for the online channel regardless of the availability of a vaccine,” Patel said, “which supports our view that the uptick in digital demand is here to stay.”
Patel says Amazon won’t be the only winner. The demand for hand-made face masks has remained high, which is good news for Etsy, while Nike could see a boost from continuing consumer demand for athleisure as they “nest” at home in the colder winter months.
Nike has already been benefitting from the trend. The company reported fiscal first quarter earnings per share of $0.95 late last month, significantly beating analysts’ expectations for earnings per share of $0.46.
Following the earnings beat, Patel reiterated his Buy rating on the stock and boosted his price target from $132 to $149 – nearly 15% higher than the price as of this writing. He noted that for Nike, consumers’ shift to online shopping has “been even more pronounced given its strategy to emphasize direct channels of distribution. The company’s Digital transformation is tracking years ahead of schedule; this is driving attractive economics while improving customer engagement, which is increasing loyalty.”
Saporu said of Nike’s earnings, “You saw them stabilize top line. they were lower in the retail footprint, but they had digital sales increasing, and I think that was really important as they tried to look to shift their strategy during this time, and they’re also still paying a dividend to their investors, which I think is really important.”
“It is not surprising that we are seeing Nike begin to rebound and beat expectations,” said Sabrina McPherson, managing director at Publicis Sapient. “Its leading position in digital investments and continued commitment to leading on consumer experience has provided the foundations to address the sustained changes in buying behavior that the pandemic has accelerated… they are well on their way to writing the playbook on using digital to meet consumers where they are with what they want.”