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Skip NavigationMarketsBusinessInvestingTechPolitics & PolicyVideoWatchlistInvesting ClubPROLivestreamMenuA recent sell-off in some of the best-known consumer stocks gives investors a chance to buy positions in companies that can withstand pressure on household spending, according to a pair of Wall Street analysts. The consumer staples and consumer discretionary sectors are both underperforming the S & P 500 in the past three months. The State Street Consumer Staples Select Sector SPDR ETF ( XLP ) is down 4% during that span, and the Consumer Discretionary ETF ( XLY ) by 5%. The S & P 500 is up 4.3% in the same period. Several consumer brands that have gotten hammered now stand out as potential opportunities. Home Depot and McDonald’s have fallen 18% in three months, while Marshall’s and Homesense parent TJX Companies is off 10%. Costco is little changed and Walmart is down 3%. Stubbornly high interest rates and gas prices have combined to weigh on the group, said Paul Hickey, co-founder at Bespoke Investment Group. Higher borrowing costs and energy bills hurt consumer spending, while rising Treasury yields give investors an alternative to stocks. “As long as you see this upward move in interest rates an oil prices, it’s going to be hard for this sector to rally,” Hickey noted. Even blue-chip consumer names are not “immune from the pressure.” In the third quarter, the 10-year Treasury yield — the benchmark for mortgages and auto loans — jumped 52 basis points, to 5.29%. (One basis point equals 0.01%, or 1/100th of a percent.) Diesel prices have surged 68% since the start of the Iran war, according to AAA, increasing transportation and manufacturing costs for businesses and adding to inflationary pressure. Wage growth hasn’t kept up. That’s a “major headwind for the sector,” Hickey said. In September, average hourly earnings increased by just 0.1%, according to the Bureau of Labor Statistics’ latest labor report , putting the 12-month gain at 3%. August consumer prices, the latest available, rose at a 3.4% annual rate, leaving workers’ aggregate pay trailing inflation. Rather than buy the entire group, investors are often looking at individual stocks instead, said Joe Feldman, analyst at Telsey Advisory Group. When high-quality companies have had “a significant decline in share price, that’s often a good time” to look again, he said. Home Depot The housing market has been under pressure as reduced housing supply and lofty mortgage rates crush affordability. Yet Home Depot has posted seven straight quarters of comparable stores growth, with expectations that will continue in this year’s second half, Feldman said. HD 3M mountain HD’s 3-month performance. Home Depot is performing well, and taking market share, “despite their traditional macro backdrop being under significant pressure,” the analyst said. McDonald’s McDonald’s has worked this year to win back lower income consumers. While management has dealt with a declining value perception, Feldman said the burger chain continues to “put up pretty solid numbers” even as consumer spending softens. MCD 3M mountain MCD 3-month performance. Costco Costco is better able to weather weaker spending because many of its members come the higher income cohort. Costco’s sales and earnings performance have been “phenomenal,” Feldman said, while their “cash pile has been building.” Next year could bring a special dividend, which Costco last paid in January 2024. COST 3M mountain COST 3-month performance. The membership-only warehouse club has also benefited from consumers flocking to buy cheaper gasoline at Costco gas stations. But the stock trades at a high multiple, meaning Costco has to clear a high bar to beat expectations. Walmart “Walmart’s business is as good as it has been,” even though the nation’s largest brick-and-mortar retailer reported a same-store sales miss in its most recent quarter, Feldman said. Walmart “keeps getting bigger,” and exemplifies a high-quality company with a great balance sheet that manages its business well regardless of the economic environment. WMT 3M mountain WMT’s 3-month performance. Longer term, Walmart and Costco are both companies that have shown their ability to withstand macroeconomic pressures through multiple business cycles, although the short term could prove a “bumpier ride,” Bespoke’s Hickey said. TJX Companies The off-price retailer suffered through a self-inflicted merchandising misstep last quarter when the wrong inventory mix hurt parts of the business. But management has said trends have already improved. TJX 3M mountain TJX 3-month performance. By contrast, Feldman said sales and earnings at off-price competitor Ross Stores haven’t missed a beat, creating a perception that Ross is taking market share from TJX. But TJX tends to thrive during the end-of-year holidays as consumers hunt for well-priced treasures.Read More