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2016 is looking like a grim year for stocks. The global economy is faltering. America is not doing terribly well. Earnings revisions are already coming in at negative 5% year over year.
With the economic backdrop looking so lousy, I do not expect consumer discretionary stocks to do very well. However, some judicious stock-picking should provide you with opportunities in the sector.
Look to the Travel Boom
There has been one consistent winner over the past couple of years, even as the market and the economy have struggled, and that’s travel. It’s actually been booming. The primary reason is that middle-income and upper-income people have the money to travel and have been putting their discretionary money to work in the sector.
Combined with the fact that hotel supply lags demand, hotels have pricing power and have been able to enjoy substantial revenue increases. Now, if one chooses to be strict in terms of sector definition, travel is actually not considered consumer discretionary. However, I’ve never let semantics get in the way of a good investment.
Thus, I think you want to own some form of hotel investment. I think you are fine going with Marriott International (NYSE: MAR), especially considering its buyout of Starwood (NYSE: HOT). You’ll have a rather diversified set of properties across the hotel spectrum as well as geographically.
What I like even more, however, is a hotel REIT: Ashford Hospitality Trust (NYSE:AHT). Ashford is rejiggering its large hotel portfolio to concentrate more on the upper-upscale and luxury properties to take advantage of the wealthier Americans who are spending money on travel.
Ashford has always managed its capital and leverage intelligently, and right now, the market has foolishly sold the stock off to insanely undervalued levels. At $6 per share, you can get a stock that I think is worth closer to $13, and pays a sustainable and reliable dividend of 7.61%. I own the stock and am buying more here.
Airlines and Entertainment
If you are going to stay at a hotel, you have to get there somehow. That means airlines. There are a few plays here, but you really can’t go wrong with Southwest Airlines (NYSE: LUV) which remains at the top of its game. It’s one of the only airlines that has more cash than debt, to the tune of $3.1 billion vs. $2.38 billion. Free cash flow is almost $1.5 billion over the trailing 12 months.
OK, enough travel. Are there any “traditional” discretionary stocks worth looking at?
I see two that I like, and that I own. The Walt Disney Co. (NYSE: DIS) is considered discretionary. The stock has been under pressure lately because of overblown concerns at ESPN. The issues surrounding revenue at ESPN are going to be sorted out, because Disney always sorts things out. I see sports moving to more a la carte models which will be even more valuable. Plus, the “Star Wars” relaunch is going to be insanely profitable. I would accumulate here at $100 and average down if the stock falls.
Finally, I would buy Starbucks (NASDAQ: SBUX). The stock is about 10% off its high, and it continues to expand globally while enhancing its product offerings here and abroad. The company has no hesitation about experimenting, and that means it is seeking to grow and not rest on its laurels. It is now an intrinsic part of American society, with great balance sheet and cash flow.
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