The SPDR Retail ETF (XRT) is down 3.8% year-to-date, and consumer discretionary as a whole has been the worst performing of the 11 major S&P sectors. But most of the hard data still points to a healthy US economy. I like Carnival Corp. (CCL), writes Chris Preston, chief analyst at Cabot Value Investor.
The weakness makes sense. Tariffs threaten to hit US retailers hardest, including the many companies that sell products like toys, child car seats, and sports apparel, such as Dick’s Sporting Goods Inc. (DKS). Combine that with escalating fears of a US recession – also brought on by tariffs – and it could be a double whammy for retailers who don’t sell the essential everyday items that consumers buy regardless of the economic environment.
Yet as of now, tariffs are on hold. In early April, a week after “Liberation Day,” President Trump instituted a 90-day pause on high tariffs with basically every country but China. Earlier this month, the administration inked a tariff deal with the UK.
Deals to avoid tariffs could be worked out with each of the roughly 130 nations they were levied against before they ever do any real damage. If that happens, then it could be a “no harm, no foul” situation, and the US economy will continue on its merry way, with consumers never really reining in their spending.
Carnival Corp. (CCL)
While US retailers are doing just fine, their share prices are not. And therein lies an opportunity. Consumer discretionary stocks as a group trade at 20.5x forward earnings estimates, less than the 22.1 forward P/E ratio in the S&P. That’s roughly middle of the pack among S&P sectors in terms of valuation – but for a sector that’s posted the worst YTD performance.
Which consumer stocks stand out as being particularly undervalued? Well, we just added one of them: Cruise line giant CCL. It’s off to a rousing start for us – and should continue to work.
Recommended Action: Buy CCL.
