Institutional investors expect a rise in consumer stocks

Markets are preparing for the next interest rate cycle proposed by the Federal Reserve (Fed). While most sectors have already priced in this potential turnaround, some have yet to reflect this upward trend. In the last six months, the SPDR fund for selected consumer discretionary sectors NYSEARCA: XLY it underperformed the broader S&P 500 index by up to 11%.

Other sectors, such as technology stocks, outperformed the S&P by more than 5% during this period. Led by all-time highs in names like Nvidia Cor. NASDAQ:NVDAThis cyclical shift has left plenty of room for consumer discretionary stocks to catch up.

With US consumer sentiment reaching levels not seen since 2021, Wall Street institutions appreciate The Goldman Sachs Group Inc. NYSE:GS and the Vanguard Group saw fit to investigate the space. After entering your location PriceSmart Inc. NASDAQ: PSMT up 14.9% last quarter, Goldman’s $2.2 million investment offers lots for consideration on Main Street.

PriceSmart: a Costco in disguise

While not as large as its main competing business model, Costco Wholesale Co. NASDAQ: COSTPriceSmart’s $2.5 billion market capitalization allows it to grow much faster than Costo and its $316 billion capitalization.

Investors can see this play out in both companies’ financial quarters. Costco reported 6% sales growth in the second quarter of 2024, while PriceSmart’s earnings presentation shows 10.7% growth over the trailing 12 months.

Money managers may shift their preferences towards stocks that offer above-average growth in the coming quarters. As traders think the Fed may cut interest rates in May or June 2024, a trend spotted in the FedWatch tool offered by the CME Group Inc. NASDAQ: ECMthe window for preferential treatment is closing.

What’s better than a stock that offers consumer discretionary and consumer staples? A stock that does all of this can still grow its earnings per share (EPS) by 19% over the next 12 months. Since PriceSmart’s business model is relatively interchangeable with Costco’s, Wall Street may prefer this EPS growth over Costco’s 9.4%.

This EPS gap could be one reason PriceSmart shares have outperformed Costco by nearly 6% over the past 3 months. Furthermore, markets think it may continue to rise to break out of the $75 to $85 price channel.

Looking at price action, PriceSmart has rallied 18.2% over the past year. In comparison, the variety store sector only managed to increase by 2.3%.

Valuations could benefit from a boost

Based on the price-to-book spread, PriceSmart becomes the most attractive buy target. The stock’s 2.4x P/B ratio comes within an 85% discount to Costco’s 15.6x valuation, despite it being set to grow its EPS at more than double the rate.

Another worthy mention in the space is Target Co. New York Stock Exchange: TGT, which can be purchased at a P/B ratio of 6.1x. This valuation gives PriceSmart the edge, as it is 61% off Target’s multiple.

There is a clear reason for this discount, which is also the same reason why PriceSmart’s valuation may be higher. According to company financials, Target’s gross margins are 27%. PriceSmart, which sacrifices profits to serve a broader audience, operates on gross margins of just 17%.

Of course, this dynamic would make Target a better proposition any day, but these are not regular times. As more Americans battle stubborn inflation, alternative shopping places like PriceSmart could become the answer everyone is looking for.

Thinking the stock could see better days, Vanguard Group teamed up with Goldman to boost its PriceSmart position by 4.5%, worth about $11.3 million as of March 2024.

As the Volatility Index (VIX) rose above 16%, a level not seen since October 2023, investors may begin a “risk aversion” rotation, giving PriceSmart’s model the opportunity to lead the way. rise to the occasion and beat its much larger competitors.

Because PriceSmart operates in a relatively non-cyclical industry but is still expected to grow its EPS above the 13% average for the space, short interest in the stock has fallen 9% over the past month.

The stock is now trading at a new 52-week high and flirting with prices not seen since 2022 for what could become a more extended uptrend. As the company posted 18% EPS growth last quarter, analysts’ projections of 19% could potentially see the stock post earnings growth, the speculative thesis behind Wall Street’s buying.

Before you consider Target, you’ll want to hear it out.

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