Consumers are in a tight spot, squeezed between higher interest rates, lower wages, and rampant inflation. That’s pushed several consumer discretionary stocks lower. These stocks also have a potential recession looming over them.
However, some companies in this sector could be poised to rebound sharply. Here are the top three consumer discretionary stocks that should be on your watch list for 2023.
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Shopify
Online shopping is the ultimate discretionary spending. This was clearly evident in the pandemic era when Shopify (TSX: SHOP) was booming and hit an all-time high. The stock was trading at a price-to-sales ratio of 60! Now, it’s down to 13, which is much more reasonable for a software firm.
Shopify has made some strategic decisions in recent months that could help it regain its stride. Recently, the company laid off some workers to cut down on expenses. It also divested its logistics business, which was likely to be a major drain on cash flow. Now that the company is focused on high-margin segments like growth capital and merchant services, I expect the cash flow situation to improve.
Meanwhile, the underlying business is in a robust position. Shopify’s revenue grew 27% year over year in its most recent quarter. The company also swung from negative free cash flow last year to positive $86 million in free cash flow in this recent quarter.
Management expects the rest of the year to be free cash flow positive as well. That’s good news for investors. Keep an eye on this growth stock.
BRP Inc
BRP (TSX: DOO) doesn’t get as much coverage as other consumer discretionary stocks. However, this niche business has had immense success in recent years. The company offers snowmobiles, all-terrain vehicles, side by sides, motorcycles, and personal watercraft under the popular Ski-Doo and Sea-Doo brands.
This market was booming during the pandemic lockdowns. However, it doesn’t seem to have slowed down, even after the lockdowns have been lifted. BRP reported record-high revenue in its most recent quarter — $3.07 billion in total. Net income, meanwhile, was up 74% year over year during the same period.
BRP stock is currently trading at just nine times earnings per share. It’s a relatively undervalued consumer discretionary stock that should be on your radar for 2023 and beyond.
Aritzia
Aritzia (TSX: ATZ) stock has had a rough journey this year, as investors were disappointed by recent earnings results. The stock is now trading 41% below its all-time high, which wasn’t too long ago.
However, the underlying results were perfectly fine. Revenue surged by 47% to $2.2 billion in fiscal 2023. Revenue in America — a key region of focus for Aritzia — was up 66%. The U.S. locations now account for over 50% of the company’s total sales.
By 2027, Aritzia expects to deliver $3.5 to $3.8 billion in net revenue by fiscal 2027, which implies a 15-17% annual growth rate over the next five years. Meanwhile, the stock is trading at a price-to-earnings ratio of 22.2, which is fair value for a robust brand with a good track record.
This consumer discretionary brand could have much more upside ahead. Keep an eye on this TSX stock.
