In the convoluted labyrinth of the stock market, wise investors persistently hunt for undervalued consumer stocks, knowing they are often hidden gems ready to explode in value. Today's fast-paced world has not dampened the consumer sector's vitality. Instead, it has enhanced the attractiveness of these stocks, particularly when they are considered bargains. Whether you are a seasoned stock picker or a novice investor cutting your teeth, this is a prime time to consider consumer cyclical stocks.
The Consumer Discretionary Select Sector SPDR Fund (XLY, Financial) aims to mirror the price and yield performance of the Consumer Discretionary Select Sector Index before the deduction of expenses. The index is designed to accurately represent the consumer discretionary sector within the broader S&P 500 Index.
The fund has an impressive year-to-date return of 33.13%, outperforming the benchmark index, which has gained only 17.61% over the same period. This reflects the positive trend in the consumer cyclical sector, where stocks are experiencing substantial growth compared to the overall market.
Focusing on profitability, dividends and valuation, I used the GuruFocus' All-in-One Screener to find potential opportunities in this space.
Foot Locker
Foot Locker Inc. (FL, Financial) stands out as a potential rebound opportunity in the consumer cyclical sector. While it usually trades at a premium, the stock has fallen nearly 30% this year.
The company recently announced its first-quarter results, which revealed revenue of $1.93 billion. This represents an 11% drop compared to the previous year. Net income was $36 million, a 73% drop from last year.
As such, the stock appears to have come under pressure.
Despite the recent dip, Foot Locker's dividend track record proves its dedication to shareholders. In the last 10 years, the company's dividend yield has varied greatly, with a low of 0.77%, a median of 2.16% and a high of 8.30%. The yield currently stands at 6.15%, which is above the industry median of 2.50%. Further, it outperforms 84.9% of the 576 companies in its sector.
Valuation and efficiency
Analysts and investors have closely watched Foot Locker's price-earnings ratio. Over the past decade, this ratio ranged from a low of 3.14 to a high of 27.08. Currently, it is at a competitive 10.09. This ratio reflects how the market values the company against its earnings. The current earnings multiple ranks higher than 76.19% of the 735 companies in the retail- cyclical sector. Compared to the industry median of 16.81, Foot Locker's favorable valuation stands out.
Foot Locker's operating margin is a commendable 6.69%, placing it ahead of 66.48% of the 1,092 companies in its industry. When matched against the industry median of 3.49%, it is clear the company operates more efficiently than many of its competitors.
Future prospects
Even though Foot Locker received two downgrades after the earnings report, it is important to remember the stock market is not always predictable. Difficulties can lead to rebounds, and this situation might pave the way for a resurgence. After all, every challenge offers an opportunity.
Macy's
Macy's Inc. (M, Financial) might be another great pick. Even though its stock has dipped about 20% year to date, the iconic retailer reported earnings that surpassed expectations.
The first-quarter report showed an impressive $5.17 billion in revenue, a 7% increase from the year-ago quarter. While many highlighted the 46% decline in net income to $155.1 million, earnings per share topped market forecasts by 24%.
Yet, Macy's story is not all positive. The department store revised its 2023 full-year forecast downward, with some experts attributing this to emerging macroeconomic challenges.
Operational efficiency and dividend yield
Macy's operating margin is a notable 5.97%, placing it above 63.37% of companies in the retail - cyclical industry. It is also higher than the industry median of 3.49%, suggesting the company has superior operational efficiency.
With a dividend yield of 4.02%, Macy's stands ahead of 71.7% of its peers as well as the industry median of 2.50%.
Valuation and innovative approach
Over the last 10 years, Macy's price-earnings ratio has seen considerable shifts, peaking at 20.25 and dropping to a low of 2.64. The median is 11.53. The retailer's current price-earnings ratio is 4.25. It outpaces 95.1% of competitors as the industry median sits at 16.81.
Recent challenges like the pandemic, supply chain disruptions and inflation have tested Macy's mettle. Despite the setbacks arising from these hurdles, the company has launched a new small store model called"Market by Macy's" as a cornerstone of its comprehensive omnichannel approach, aiming to rejuvenate its competitive edge.
