3 Top Stocks as Consumer Sentiment Hits 2021 Highest

The US economy has just entered a new cycle. As markets shift based on their expectations six to nine months out, three consumer discretionary stocks are leading the way in this new rotation. Now that the Federal Reserve (Fed) has announced its intentions to cut interest rates in 2024, retail investors would benefit from jumping on the wave.

Traders are now pricing in these potential interest rate cuts that will take effect by May or June 2024. Investors can track this sentiment by tracking the FedWatch tool offered by CME Group Inc. NASDAQ: ECM. Lower interest rates and a new high in consumer confidence (not seen since 2021) could impact specific stocks.

Names like Home Depot Inc. New York Stock Exchange: HD, Starbucks Co. NASDAQ: SBUXand even Nike Inc. NYSE:DI they will probably require a few dollars of investment during the next rotation. After all, the SPDR fund for selected consumer discretionary sectors NYSEARCA: XLY It has to catch up with the rest of the S&P 500 Index, as it has underperformed by 7% over the last 6 months.

Home Depot management is on time

Home Depot management looked outside its proven business model to spur growth by identifying the latest trends in real estate. By announcing its $18 billion acquisition of SRS Distribution, a roofing company, Home Depot is letting retail investors know where the money is.

Lower interest rates could make mortgage financing more accessible for new homebuyers. The construction stocks that Warren Buffett had bought, for example D.R. Horton Inc. NYSE: DHIPave the way for a new rush to prepare your real estate inventory before these buying sprees arrive.

Home Depot is already poised to take advantage of do-it-yourself demand and is looking to capitalize on this tailwind in the roofing industry.

As of November 2023, building permits in the U.S. are on the rise, so builders and bankers may feel comfortable starting projects that enter the housing market when rates are cut.

Analysts at Mizuho Financial Group Inc. NYSE:MFG see Home Depot get as high as $415 per share. This valuation has yet to reflect the potential upside from the SRS acquisition. Asset managers who run the consumer ETF agree that Home Depot is now the third-largest holding in the fund for good reason.

Starbucks drinks are within budget

What’s more discretionary than a cup of Starbucks coffee? After the stock fell to 79% of its 52-week high, some investors aware of the company’s value may turn around with buy orders. While consumers may have cut back on spending due to persistently high inflation rates in the United States, Starbucks emerged as the winner.

With consumer confidence at new cyclical highs, the average ticket amount at the coffee giant increased by 4%. Comparable sales in the United States increased 5%, meaning consumers purchased more products and felt willing to pay more for each trip to Starbucks.

This is the pricing power wielded by a deeply penetrated brand; after all, stocks are liked The Coca-Cola Co. NYSE: KO they can raise prices to keep up with inflation with minimal impact on their sales. Investors can see this pricing power live in Starbucks’ financials.

With a gross margin of 27%, significantly above average, Starbucks has plenty of room to continue raising prices to combat rising production costs due to inflation. Furthermore, healthy management efficiency allows the stock to capitalize on its capital with an average rate of return on invested capital (ROIC) above 20% over the last five years.

Wall Street analysts want to see the stock at $110 per share, 20% higher than today’s price. On top of that, EPS is expected to grow 16% over the next 12 months, something no $100 billion company can achieve unless supported by consumers and strong fundamentals.

Nike Stock Triple Bottom

Another giant that is open to a potential wave of purchases is Nike. After falling to 73% of its 52-week high price, the stock formed a triple bottom pattern along the $90-$95 range.

Surprisingly, Nike underperformed SPDR fund for selected consumer discretionary sectors NYSEARCA: XLY by as much as 49% over the past 12 months, creating an even wider gap for investors to fill.

Because of Nike’s international presence, the stock could offer an additional layer of safety in the face of potential interest rate cuts from the Fed. If these cuts unexpectedly hurt the dollar, companies with an international presence, such as Nike or Ermenegildo Zegna New York Stock Exchange: ZGNit could cushion a collapse with stronger currencies, such as the Euro or Yen.

With a stock price target of $116.50 today, Wall Street sees up to 24% upside in this timeless brand. Furthermore, even after bearish momentum, only 1.5% of total stocks are short. Not even the bears dare to go against Nike in this cycle.

Before you consider Ermenegildo Zegna, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Ermenegildo Zegna wasn’t on the list.

While Ermenegildo Zegna currently has a “Hold” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here