LVMH benefits from enduring industry dynamics such as rising disposable incomes in Asia and ‘premiumization’ trends, which means offering consumers higher quality and generally more expensive goods, says a portfolio manager.Richard Vogel/The Associated Press
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Consumer staples stocks such as grocery stores, pharmacies, and food and beverage companies are considered safe bets for investors when the economy looks like it could tip into a recession.
However, some discretionary companies that sell wants over needs – such as clothing, furniture and electronics – can also be good investments when the economy slows. The key is picking companies that can withstand a broader pullback in consumer spending – and buying them at the right time.
Some consumer stocks have sold off lately and may be oversold, analysts at the Bank of Nova Scotia stated in a recent report. “For the brave, some of the most beaten-down consumer-related stocks could snap back strongly in the coming months,” they wrote.
The Globe and Mail asked three Canadian money managers to pick two consumer discretionary stocks they like right now and why.
Craig Jerusalim, senior portfolio manager at CIBC Asset Management in Toronto
The pick: Restaurant Brands International Inc. QSR-T
Restaurant Brands International’s (RBI) franchised business model provides a capital-light, high-margin and recurring revenue stream from flagship brands such as Tim Hortons, Burger King, Popeyes and most recently, Firehouse Subs. Mr. Jerusalim likes the company’s franchised-based royalty model in the current inflationary environment as it benefits from price increases but isn’t exposed to the rising cost structure of its franchisees. The quick-service industry is also relatively defensive when compared with other discretionary subsectors due to its value proposition at a time when consumers are financially stretched.
Recently, the industry has come under some pressure from the potential impact that GLP-1 drugs (such as Ozempic) can have, mostly in reduced appetite. While Mr. Jerusalim isn’t dismissing these concerns, he believes RBI shares offer good value, trading at a price-to-earnings multiple that’s 20 per cent below its historical average. Also, RBI is trading at a wide discount to peers such as McDonald’s Corp. MCD-N despite offering similar growth but better free cash flow conversion, which is how much of the company’s earnings before interest, tax and depreciation (EBITDA) is converted to cash.
The pick: Spin Master Corp. TOY-T
Spin Master, the company behind brands such as Paw Patrol, Kinetic Sand and Bakugan, is inexpensive, defensive and well-capitalized with a strong track record of growth. Mr. Jerusalim sees several attributes that set the company up for success regardless of macroeconomic and interest rate forecasts.
For example, Spin Master trades at a significant 50 per cent discount to its U.S. peers on valuation multiples such as enterprise value to EBITDA. Also, its toys, games and digital offerings are relatively defensive even during recessions and volatile markets as parents always seem to sacrifice for their young children and consistently fulfill their birthday wishes and buy holiday presents.
The company is well-positioned to grow both organically and through acquisitions. Spin Master recently made the largest acquisition in its history, buying beloved early childhood play brand Melissa & Doug. Even after this large purchase, the company maintains a much stronger balance sheet than its peers. The acquisition will help it accelerate growth and free cash flow generation.
Paul Harris, partner at Harris Douglas Asset Management Inc. in Toronto
The pick: Leon’s Furniture Ltd. LNF-T
Leon’s is a family-run business that has managed costs and inventory well despite recent inflationary pressures. Historically, it has also leveraged challenging economic environments to gain market share. The company has a strong balance sheet and dividend and continues to reduce its debt.
Mr. Harris says it’s a well-known furniture brand across Canada and should benefit from the growing number of new immigrants coming to this country. Leon’s is also unique in that it owns a lot of the real estate attached to its stores. It plans to spin it off into a real estate investment trust, which could help it raise more capital.
The pick: Amazon.com Inc. AMZN-Q
Mr. Harris likes Amazon for its sheer scale compared to its competitors. It also has a very broad selection of products and relatively low prices. While there has been a lull in e-commerce since the pandemic, he doesn’t see e-commerce ever going away. That’s the retail side of the business. Its Amazon Web Services cloud business is also attractive. It will benefit a great deal from growth in the cloud over the next several years.
Another attractive part of the business is its advertising segment, which targets consumers based on their buying habits. All three of these divisions are growing. While there are some regulatory issues to consider, Amazon’s size and scale make it a great story.
Stan Wong, portfolio manager and senior wealth advisor with The Stan Wong Group at Scotia Wealth Management in Toronto
The pick: O’Reilly Automotive Inc. ORLY-Q
O’Reilly Automotive is the largest specialty retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories in the U.S. with more than 5,900 stores. It sells products to do-it-yourself customers, professional mechanics and service technicians. Mr. Wong says the company is well-positioned to benefit from industry tailwinds, such as the growing need for maintenance and repairs due to the aging automotive vehicle fleet.
The automotive aftermarket industry is also known for its business resilience given that the maintenance and repair of vehicles continue despite economic slowdowns. During the past five years, O’Reilly has demonstrated robust financial performance with an average annual revenue gain of more than 10 per cent and average annual earnings growth of almost 19 per cent.
The pick: LVMH Moet Hennessy Louis Vuitton SE LVMUY
It’s a luxury goods powerhouse boasting an unparalleled brand portfolio including globally recognized names such as Louis Vuitton, Christian Dior, Givenchy, Tiffany & Co. and Bulgari. Mr. Wong says LVMH’s extensive global reach enables it to tap into surging demand for luxury products, while its strong pricing power and market share leadership bode well for continued success.
LVMH benefits from enduring industry dynamics such as rising disposable incomes in Asia and “premiumization” trends, which means offering consumers higher quality and generally more expensive goods.
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