At the moment, it’s easy to be dismissive of consumer discretionary stocks. Rising interest rates and soaring inflation that has little end in sight are a toxic brew for consumer cyclical equities.
Not surprisingly, those factors are contributing to declining consumer confidence. Increasing speculation regarding a recession isn’t helping matters. Would you plan a pricey vacation knowing that inflation relief is far from imminent and that a recession could come to pass? Probably not, unless you are fortunate enough to be truly wealthy..
Making matters worse for the consumer discretionary sector this year are the struggles of Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA), which combine for more than 41% of the cap-weighted version of the S&P 500 Consumer Discretionary Index. It’s a tough mountain to climb for any sector when 41% of its weight is out of favor.
At this point, it may be merely slight hyperbole to say the consumer discretionary sector is facing on a blood-on-the-streets type of scenario. On the other hand, this could be the ideal time to evaluate the sector for deals, including researching among forlorn e-commerce names.
E-Commerce Worth Evaluating Today
Due to significant buzz and the convenience offered by e-commerce during the darkest days of the coronavirus pandemic, some investors are apt to think this is how a majority of U.S. retail sales occur. In reality, however, there’s plenty of room for long-term growth.
“Think online shopping accounts for a majority of US retail sales? Think again. Total retail sales in Q1 2022 were over $1.7 trillion in the US alone and e-commerce represented just over 14% of total sales,” according to ProShares research.
In addition to that buoyant growth outlook, there’s an element to e-commerce some investors may not be aware of: Superior profit margins relative to brick-and-mortar retailers. That’s something to consider amid today’s bleak inflation outlook.
“E-commerce firms may have an edge over bricks-and-mortar retail that typically has high fixed costs for storefronts and employees,” adds ProShares. “By contrast, e-commerce companies with a digital-first retail model may operate with less overhead and can adjust prices in real time. E-commerce profit margins compared with those of bricks-and-mortar over the past five years have been higher over 75% of the time.”
Rare Moment for E-Commerce
There’s no denying this is a dreadful environment for consumer cyclical stocks. With food and fuel costs surging, the typical investor is likely reining in indulgences on everything from dining out to travel and more.
Just look at data from Amazon’s most recent Prime Day, which happened last week. Two of the top-selling items were diapers and snacks. That’s just one sign, but it underscores the precarious state of the consumer today.
Still, ignoring e-commerce today could prove foolhardy, particularly when there’s decent value and strong earnings growth to be had.
“The ProShares Online Retail Index and the Solactive-ProShares Bricks-and-Mortar Retail Store Index are priced at similar levels for the first time in about five years; however, online retail may outpace their traditional counterparts going forward,” concludes ProShares. “Online retail has an estimated projected 14% growth in earnings by 2023, versus only 2% growth for bricks-and-mortar retail. There is an opportunity to invest in a fast-growing segment at an access point similar to traditional retail.”