10 Consumer Discretionary Stocks Set to Outpace the Market
Consistently choosing winners is hard. But staying objective and consistent in “how you choose” can sometimes produce alpha and give you an edge.
Here is one such selection strategy. These 10 stocks – for their valuation level – have no other sector peers offering better growth or cash flow margins. We call them the Best Bets.
| Best Bets In Consumer Discretionary Sector | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ABNB | BKNG | MCD | ETSY | LOPE | PRDO | ALSN | CROX | GRMN | WH | |
| P/E | 28.4 | 36.5 | 25.9 | 41.8 | 26.0 | 16.3 | 9.4 | 19.7 | 30.2 | 18.4 |
| P/EBIT | 28.7 | 22.5 | 17.9 | 16.3 | 20.3 | 11.9 | 7.0 | 17.2 | 27.0 | 10.9 |
| Rev Chg Q | 12.7% | 16.0% | 5.4% | 3.8% | 8.8% | 26.6% | -0.2% | 3.4% | 20.4% | 8.2% |
| Rev Chg LTM | 10.2% | 11.7% | 1.2% | 2.4% | 6.5% | 6.3% | 2.7% | 2.0% | 19.6% | 3.9% |
| Rev Chg 3Y Avg | 16.3% | 19.9% | 3.4% | 5.6% | 5.8% | 1.7% | 8.0% | 14.5% | 11.0% | -3.2% |
| FCF/Rev 3Y Avg | 40.5% | 34.6% | 27.2% | 23.9% | 22.6% | 21.0% | 20.9% | 19.8% | 19.4% | 19.4% |
[1] Choosing top 10 best bets from each sector quarterly is an alpha producing strategy vs sector benchmark
[2] Historical annualized return of 14%, alpha of 3.3%, and sharpe of 0.6
This is an effective way to look at stocks. When you invest, your are making a purchase and you would ofcourse want most out of the price you are paying. And that is exactly why this works. But when it comes to a sophisticated portfolio – this becomes just one of the perspectives. We blend in a lot more, and the result is our Trefis High Quality Portfolio which is designed to protect wealth while giving upside exposure.
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How Do We Choose?
We search the entire sector and for each stock, we try to find other stocks in the sector that have lower valuation but higher revenue growth and higher cash generative capacity.
If there are no such alternatives, we call the stock in question as one of the “best bets”. We then filter top 10 best bets based on free cash flow margins.
[1] We use P/E and P/EBIT ratios as measure of valuation.
[2] For revenue growth, we check last quarter, last 12 months, and average of last 3 years.
[3] Finally, we use last 3 years’ average free cash flow margin as measure of cash generative capacity.
How Well This Selection Works?
Based on rigorous backtest spanning nearly a decade, choosing such bets and holding them for at least a quarter, turns out to be a valid portfolio strategy that can beat the sectoral index XLY
The stats below for the period 12/31/2016 to 6/30/2025
| Value | |
|---|---|
| Annualized Return | 13.5% |
| Alpha | 3.3% |
| Sharpe Ratio | 0.6 |
| Beta | 0.7 |
| Pct Months +ve Return | 63.7% |
The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.