When you go shopping, there is a fine distinction between things that you need and things that are merely nice to have. The consumer discretionary sector falls in the second group — non-essential yet desirable things that people spend money on when extra cash is available. Unlike consumer staples companies, consumer discretionary stocks usually thrive during periods of economic stability but tend to tumble during rough times.

McKinsey & Company recently forecast U.S. sales of discretionary products to surge as the country continues to recover from the pandemic. The report reveals that more than 50% of consumers plan to spend extra on electronics, beauty products, and apparel. In addition, Deloitte points out that personal consumption expenditure is forecast to go up by 7.6% in 2021.

Despite significant challenges brought on by the pandemic, the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY) gained 34% in the past year. Moreover, consumer discretionary stocks delivered a solid performance in recent months.

While investor concerns over the delta variant of Covid-19 and short-term profit taking could put pressure on the sector’s upside in early October, the rest of the year could still see significant gains. Therefore, I’ll discuss seven consumer discretionary stocks that are expected to gain traction in the coming months.

• Best Buy (NYSE:BBY)
• Domino’s Pizza (NYSE:DPZ)
• Hasbro (NASDAQ:HAS)
• O’Reilly Automotive (NASDAQ:ORLY)
• Pool (NASDAQ:POOL)
• Roblox (NYSE:RBLX)
• Stanley Black & Decker (NYSE:SWK)

Consumer Discretionary Stocks: Best Buy (BBY)

• 52-week range: $95.93 – $128.57
• Dividend Yield: 2.62%

Richfield, Minnesota-based Best Buy is one of our largest consumer electronics retailers, with product and service sales representing about 10% of U.S. personal consumer electronics and appliances expenditures.

Best Buy announced second-quarter results (July end) for fiscal 2022 in late August. Total revenue increased 20% YOY to $11.9 billion. Net income came in at $734 million, or $2.90 per diluted share, compared to net income of $432 million, or $1.65 per diluted share, in the prior-year period. Non-GAAP diluted earnings per share (EPS) surged 74% to $2.98. Cash and equivalents ended the quarter at $4.5 billion.

On the results, CEO Corie Barry remarked, “When we compare to two years ago, our results are also very strong. Compared to the second quarter of FY20, revenue is up 24% and our operating income has more than doubled.”

Enterprise comparable sales increased 20% during the second quarter as in-store spending made a significant comeback. With its hybrid selling model, the company anticipates strong growth in the near future. Best Buy has become a significant e-commerce business that provides consumers with various ways to receive their orders.

At-home entertainment and remote work trends offer powerful tailwinds that should lead to further revenue growth in the long term. The company raised full-year enterprise comparable sales growth outlook to a range of 9% to 11%. Best Buy also offers a dividend yield of 2.6% as well as regular share repurchases.

BBY stock hovers slightly above $105, up 7% this year. The shares have a reasonable valuation, trading at 12.6x forward earnings and 0.50x trailing sales.

Domino’s Pizza (DPZ)

• 52-week range: $319.71 – $548.72
• Dividend Yield: 0.80%

Ann Arbor, Michigan-headquartered Domino’s Pizza is a restaurant operator and franchisor with over 17,800 stores across 90 countries. The company generates revenue through selling pizza, salads, wings and sandwiches at company-owned stores, royalty and marketing contributions from franchise-operated stores, and its network of dough manufacturing and supply chain facilities.

Domino’s announced Q2 results in late July. Revenue went up by 12% to $1.03 billion. Net income came in at $117 million, or $3.06 per diluted share, compared to $119 million, or $2.99 per diluted share, in the previous year. Second-quarter adjusted diluted EPS increased 4.3% YOY to $3.12. Cash and equivalents ended the quarter at $292 million.

CEO Ritch Allison cited, “I am pleased that in the second quarter our cumulative two-year same stores sales were up 19.6% domestically and 15.2% internationally, signifying meaningful and sustained growth.”

Domino’s benefits from economies of scale that enable the company to expand its operating margin. Thus, the company can decrease prices, increase customer value, or employ other marketing tools to cope with its competitors. However, food delivery aggregators such as DoorDash (NYSE:DASH) or Uber’s (NYSE:UBER) Uber Eats is expected to pose competition. Consumers now have more choices when deciding what to order for delivery, which may lead to a slowdown in revenue growth in the long term.

Domino’s efficient business model and bright prospects are no secret to the market. Therefore DPZ stock has a lofty valuation, currently trading at $470 territory. It’s up 23% year-to-date (YTD). The stock is trading at 30 times forward earnings and 4.25x sales, which looks expensive historically. Interested readers would find better value around $450.

Consumer Discretionary Stocks: Hasbro (HAS)

• 52-week range: $81.69 – $104.89
• Dividend Yield: 3.15%

Pawtucket, Rhode Island-based Hasbro is a branded play company providing children and families worldwide with entertainment offerings. From toys and games to motion pictures, television programming, and a licensing program, Hasbro reaches consumers through its well-known brands.

The group released Q2 results in late July. Net revenue grew 54% YOY to $1.32 billion, impressive given that it was also up 9% compared to solid growth in Q2 2019. Hasbro generated adjusted net earnings of $145.4 million, or $1.05 per diluted share, compared to adjusted net earnings of $2.7 million, or 2 cents per diluted share, in the prior year quarter. Cash and equivalents ended the quarter at $1.2 billion.

Following the announcement, CEO Brian Goldner remarked, “Consumer products revenue increased as demand remains robust for Hasbro toys and games and entertainment revenue grew as we are producing entertainment with strong deliveries.”

Hasbro reported solid growth across a wide range of the company’s brand portfolio. While franchise revenue soared 72% YOY, the digital gaming segment surged more than 100%. In addition, the company saw double-digit percentage sales increases in each of its four geographical reporting segments, suggesting an extensive recovery in worldwide consumer spending.

Each of Hasbro’s segments is expected to achieve double-digit growth this year. Combined with a dividend yield of 3.1%, HAS stock is an attractive entertainment stock for long-term investors. It is about $87, down 7% YTD. The shares trade at 16.2x forward earnings and 2x trailing sales.

O’Reilly Automotive (ORLY)

• 52-week range: $424.03 – $629.39

Springfield, Massachusetts-based O’Reilly Automotive is one of the largest sellers of aftermarket automotive parts, tools, and accessories, serving professional and do-it-yourself (DIY) customers. The company sells branded as well as own-label products, with the latter category comprising nearly half of the sales.

O’Reilly issued Q2 results in late July. Revenue surged 12% YOY to $3.47 billion. The company reported net income of $585 million, or $8.33 per diluted share, compared to $532 million, or $7.10 per diluted share, in the previous year. Cash and equivalents ended the quarter at $632 million.

CEO Greg Johnson remarked, “Team O’Reilly continues to deliver consistently outstanding service to our customers and produce record-breaking financial results, highlighted by our 9.9% increase in comparable store sales for the quarter, on top of a 16.2% increase in the prior year.”

O’Reilly has a resilient business that thrives both during booming economic periods as well as during recessions. Since the start of the pandemic, O’Reilly has registered double-digit percentage sales growth in each of the past five quarters. While people tend to drive more when the economy is strong, consumers delay new car purchases and do their best to extend the life of their existing vehicles in tough times.

Management anticipates operating margin to come in more than 20% for the 2021 fiscal year. ORLY stock hovers at $600, and is up 32% so far this year. With forward P/E and price-to-sales ratios of 20.50x and 3.50x, respectively, O’Reilly is a quality stock, appropriate for most long-term portfolios. But a potential decline toward $590 would improve the margin of safety.

Consumer Discretionary Stocks: Pool (POOL)

• 52-week range: $305.47 – $500.85
• Dividend Yield: 0.73%

Covington, Louisiana-based Pool is the world’s largest wholesale distributor of swimming pool supplies. The company operates more than 400 sales centers worldwide, selling national-brand and private-label products to approximately 120,000 customers.

Pool released Q2 results in late July. Revenue surged 40% YOY to a record $1.79 billion. Net income increased by 65% YOY to $260 million, or $6.37 per diluted share, compared to $158 million in the prior-year period. Cash and equivalents ended the quarter at $58.5 million.

CEO Peter D. Arvan remarked, “Through our supply chain management discipline and our capacity creation initiatives, we yielded exceptional improvement in both gross margin and operating margin during the quarter. As part of our strategic growth initiatives, we continued to add to our network through new sales center openings and two acquisitions that closed in the second quarter.”

The group is well-positioned to benefit from the rising demand for pools. Almost 60% of the company’s revenue is derived from non-discretionary maintenance and minor repair products. These revenues are unlikely to disappear in any kind of market.

POOL stock has delivered an annualized total return of over 30% over the past 10 years. It currently hovers at $435, up 17% YTD and 35% over the past year. Shares trade at 3.70x trailing sales.

Roblox (RBLX)

• 52-week range: $60.50 – $103.87

Online entertainment platform Roblox enables users to interact with each other to explore and develop user-generated 3D experiences. Management wants the company to become a leading name in metaverse, or as Nvidia (NASDAQ:NVDA) describes it, “a shared virtual 3D world, or worlds, that are interactive, immersive, and collaborative.”

Roblox announced Q2 results in mid-August. Revenue surged 127% YOY to $454 million. Net loss came in at $140 million, or 25 cents loss per diluted share, compared to a net loss of $71.5 million, or 40 cents loss per diluted share, in the prior-year quarter. Free cash flow increased 70% YOY to $168 million. Cash and equivalents ended the quarter at $1.8 billion.

On these metrics, CEO David Baszucki said, “In the quarter ending June 30, 2021, cash from operations and free cash flow continued at record levels. The third quarter is off to a strong start with our highest levels of users and engagement to date.”

During the month of August, Roblox had 48.8 million daily active users (DAUs) and 4 billion hours engaged on the platform, up about 30% from 2020. In the long term, management aims to reach a billion DAUs as well as a billion user hours every day on Roblox. Thus, it is looking to expand the user base to older demographics.

RBLX stock began trading on March 10. It currently hovers around $78, down 25% from its peak in June. If the metaverse is indeed a realistic conception of the future, RBLX stock could eventually soar to much higher levels, making the stock an attractive buy at the current price level. The shares trade at 32x current sales.

Consumer Discretionary Stocks: Stanley Black & Decker (SWK)

• 52-week range: $161.80 – $225.00
• Dividend Yield: 1.82%

Our final stock for today is the maker of hand and power tools Stanley Black & Decker The company operates three business segments: tools and storage, security and industrial.

Stanley Black & Decker announced Q2 results in late July. Net revenue increased 37% YOY to $4.3 billion. The company generated net income of $455 million, or $2.81 per diluted share, up from $234 million, or $1.52 per diluted, in the prior-year quarter. Free cash flow surged 28% to $339 million. Cash and equivalents ended the quarter at $450 million.

CEO James M. Loree remarked, “We delivered outstanding performance in the second quarter, our 33% organic growth was fueled by a robust stream of innovation, positive secular trends and strong markets while leveraging margin resiliency to deliver significant gross and operating margin expansion and record adjusted EPS.”

The company is expanding its portfolio of products through a series of acquisitions. Last month, management announced the acquisition of the remaining 80% of MTD Holdings, a global outdoor equipment manufacturer, for $1.6 billion. It’s also acquiring Excel Industries for $375 million to enhance its outdoor equipment offerings.

Management has raised its 2021 EPS outlook to $11.35 – $11.65 from $10.70 – $11.00 on an adjusted basis. The pandemic induced a deep connection with homes and gardens as well as rapid growth in e-commerce. Furthermore, the recent focus on safety and health are providing significant tailwinds to company.

SWK stock hovers at $175, down 2.5% so far this year. The shares trade at 14x forward earnings and 1.70x trailing sales.

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.