The Consumer Discretionary sector consists of businesses that sell nonessential, and therefore, discretionary goods and services. Companies in this sector include retailers, media companies, consumer services companies, consumer durables and apparel companies, automobiles and components companies. Since so much of what this sector offers is discretionary items, companies in the sector tend to do best when the economy is strongest. Unfortunately, as we will soon see, so do the prices of their stocks tend to perform best when the market is performing best.
Introduction to the Consumer Discretionary Sector
The Consumer Discretionary Sector
This is the fifth in a series of articles designed to find value in today’s stock market environment. However, it is the fourth of 10 articles covering the 10 major general sectors. In my first article I laid the foundation that represents the two primary underlying ideas supporting the need to publish such a treatise. First and foremost, that it is not a stock market; rather it is a market of stocks. Second, that regardless of the level of the general market, there will always be overvalued, undervalued and fairly valued individual stocks to be found.
My first article was titled Searching For Value Sector By Sector, my second article was titled Finding Great Value In The Energy Sector. My third article was titled Finding Value In The Materials Sector Is A Material Thing. My fourth article was titled The Industrial Sector Offers A Lot Of Value, Dividend Growth And Income.
As a refresher, my focus in this and all subsequent articles will be on identifying fairly valued dividend growth stocks within each of the 10 general sectors that can be utilized to fund and support retirement portfolios. Therefore, when I am finished, the individual investor interested in designing their own retirement portfolio should find an ample number of selections to properly diversify a dividend growth portfolio with.
This article will look for undervalued and fairly valued individual companies within the general sector 25-Consumer Discretionary. Within this general sector, there are several subsectors which I list as follows:
Consumer Discretionary: My Selection Methodology
Although I utilized the same selection methodology with this sector as I did with my four previous articles, my results were rather disappointing. What I discovered was that most of my favorite Consumer Discretionary companies were overvalued today. Apparently, the recent run-up in the stock market in general, has driven the valuations of what I considered to be the best-of-breed Consumer Discretionary companies to lofty and overvalued levels. Therefore, with this article I’m going to change my approach a little bit. What follows is a list of 23 Consumer Discretionary companies that I believe possess the characteristics that I personally favor in a dividend growth stock.
The primary characteristics I favor are a consistent historical record of above-average growth of both earnings and dividends, coupled with a valuation worthy of further scrutiny. To me, the idea of the dividend growth stock, especially one worthy of consideration into a retirement portfolio, needs to meet stringent hurdles of quality, predictability and stability. I believe the following list of Consumer Discretionary companies meet most of those criteria close enough to be worthy of additional due diligence.
However, I’m not going to feature any of the companies on this list. Instead, I plan to later take advantage of the opportunity to present an important investment lesson that the Consumer Discretionary sector currently offers by looking at my favorite Consumer Discretionary companies that alas, are overvalued. I believe this will help the dividend growth investor desirous of funding their retirement portfolios more than simply providing a list of good buy candidates.
My Top 10 Best-of-Breed Consumer Discretionary Stocks Are Overvalued
As I reviewed the Consumer Discretionary sector looking for dividend growth stocks that can be purchased at sound valuations, I quickly became very disappointed. Much to my chagrin, I discovered that my very most favorite stocks in this sector have become overvalued during the recent stock market run-up. The following is my top 10 list of favorite companies in the Consumer Discretionary sector that I would like to own if only I could buy them at fair value. But unfortunately, that is not the case at the moment.
The Dangers and Problems of Overvaluation
Perhaps the greatest danger of an overvalued stock is that it often attracts the most investor interest at precisely the time when it is a risky and dangerous investment. The problem is that many investors become interested in the stock solely based on its recent price history. If the stock has been recently rising, the greed factor kicks in, and people want to invest because they don’t want to miss future gains. Consequently, the demand to own a stock is often the highest when its investment merit is the lowest. Within this discussion, there are also lessons to be learned about the dangers of evaluating stocks based on price alone, and/or statistics alone.
The above principle is what inspired Warren Buffett to state: “You can’t buy what’s popular and expect to do well.” In other words, the bargains are found in the unpopular stocks, and that is where investors should look for new purchases.
Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL)
As I will soon illustrate, Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) is a terrific company, with a great operating history and a tremendous track record of rewarding its shareholders. A $10,000 investment in Cracker Barrel on December 31, 1998 would have grown to $42,607.60, additionally; shareholders would have received $3,403 in total dividend income. An equal investment on the same day in the S&P 500 turned an equivalent $10,000 investment into only $13,283.58, and total dividends were only $2,138. Furthermore, Cracker Barrel today offers an above-market dividend yield of 3%. These statistics alone are enough to attract many people into investing in this company.
But those numbers are nothing compared to more recent history for Cracker Barrel. Since the beginning of 2012, Cracker Barrel has provided shareholders capital appreciation of 56.6% per annum,