The Consumer Discretionary Sector (NYSEARCA:XLY) has had a remarkable rebound coming out of the pandemic-induced recession. Small and mid-sized companies in the group have trounced their counterparts in other areas, as the chart shows, with the group outpacing the rebound of the broader market by nearly 60% since the lows of March 2020. The speed of the recovery far outpaces other post-recession snapbacks of the past two decades and has resulted in stretched valuations and less attractive risk/reward profiles for investors.
While the recent rush of consumer spending could continue for a few more quarters (or longer), the pool of attractive opportunities in the market has shrunk, in our view, and capturing additional gains may require a fundamental approach that begins with a focus on valuations.
To that end, we’ve harvested gains in big ticket areas such as homebuilders, and our research has led us to opportunities in less economically sensitive businesses in the group such as discount retailers and for-profit education. We view some of the businesses in these groups as trading at attractive levels relative to many of their peers in the Consumer Discretionary sector while potentially mitigating risks associated with a winding down of federal stimulus.
This article was written by Troy McGlone, CFA and Portfolio Manager.
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