Editors' Pick: Originally published March 3.
Consumer stocks have weathered this year's market volatility better than the broader markets.
While the S&P 500 this year is still down more than 3% for 2016, the S&P 500 Consumer Discretionary Index has fallen 2.6% year-to-date, and consumer staples companies are in the black for the year.
But do all consumer stocks make good buys?
Credit Suisse analysts updated a "Top Picks" U.S. investment ideas note to clients on Wednesday. The research note puts forth the analysts' best investment ideas in a variety of sub-sectors for the next six to 12 months. Analysts were allowed to choose up to three stocks in their coverage areas and rank them. The updated exercise resulted in a list of 137 top stock ideas.
The below list is comprised of the first-ranked consumer stock picks by Credit Suisse analysts. We've paired the list with commentary from Jim Cramer, if the stock is owned by his Action Alerts PLUS charitable trust portfolio. Year-to-date returns are based on March 2 closing prices.
Industry: Consumer/Auto & Auto Parts
Year-to-date return: -21.5%
Credit Suisse's Target Price: $240
Credit Suisse Said: "We believe that electric vehicles have inherent advantages vs. internal combustion vehicles and will be disruptive to the $1 trillion+ new vehicle industry (slowly, over a long period of time).
"Tesla is at forefront of proving this, having already achieved 20%+ market share within the U.S. vehicle segment it participates (>$70k sedans). We expect this success to continue as it launches additional models over the next several years."
In addition, Credit Suisse said that "no dealer network plus combination of production cost-parity/lower operating costs should lead to significant margin premium vs. other luxury automakers. While 50% growth in 2015 addressed demand concerns, the company still needs to improve earnings/cash flow to drive share upside, in our view. We believe 2016 is that year, as incremental volume from Model X combined with only modest operating expense growth should lead to earnings/cash flow well-above Street estimates. This could both increase confidence that Tesla can self-fund a significant part of future growth and lend support to the late-decade earnings estimates that underpin the valuation."
Industry: Consumer/Media & Entertainment
Year-to-date return: 3.9%
Credit Suisse's Target Price: $90
Time Warner (TWX) operates as a media and entertainment company in the U.S. and internationally. It operates through three segments: Turner, Home Box Office and Warner Bros.
Credit Suisse Said: "We are bullish on Time Warner given (1) as a pure-play content owner, it is structurally well-positioned as consumption of video content migrates online and new opportunities to monetize emerge; (2) the roll-out of HBO NOW should tap new demand for the product and could substantially boost 2020 HBO EBITDA; (3) Turner screens well on our proprietary genre analysis, and we remain bullish on the company's ability to grow affiliate fees long term; and (4) if we were to strip out HBO at valuations of $30bn-$35bn, the rest of Time Warner is currently trading at a significant discount."
Industry: Consumer/Retail Hardlines
Year-to-date return: -5%
Credit Suisse's Target Price: $145
Home Depot (HD - Get Report) operates as a home improvement retailer. The Home Depot stores sell various building materials, home improvement products and lawn and garden products, as well as provide installation, home maintenance and professional service programs to do-it-yourself, do-it-for-me, and professional customers.
Credit Suisse Said: "We view HD as a best-in-class retailer with a strong management team that participates in one of the strongest segments of retail, marked by oligopoly pricing, reduced supply, and relative insulation from e-commerce.
"From a macro standpoint, while we have been hearing increased concerns on the broader economy, the segments that matter most for HD remain healthy (Consumer Spending and Residential Investment), and as recent performances have shown, HD has the ability to offset any slowdown in the broader economy with market share gains and other initiatives.
"HD also stands to benefit from the ongoing erosion of Sears's retail business in appliances and tools.
"Lastly, internal opportunities include the company's focus on the Pro (supported by the acquisition of Interline Brands), increasing vendor collaboration, and additional supply chain improvements, which position HD well for higher sales productivity. Combined with share buybacks, which have been growing at a 5% CAGR, we expect double-digit earnings growth to continue despite limited square footage growth opportunities."
Industry: Consumer/Retail Broadlines & Department Stores
Year-to-date return: -5.1%
Credit Suisse's Target Price: $165
Credit Suisse Said: "COST remains one of the few conventional retailers that continues to deliver positive traffic, market share gains, and a validated model for international expansion. Furthermore, their business model appears largely shielded from the margin erosion from e-commerce impacting most retailers."
Jim Cramer's Action Alerts PLUS charitable trust portfolio owns shares of Costco. Cramer and Jack Mohr, Action Alerts Plus' research director, wrote in their most recent update following the company's disappointing second-quarter earnings:
"We would advise subscribers to exercise patience and avoid trading shares barring extreme weakness -- we have consistently stated that we would consider adding to our position in the low $140s. For long- term investors, we continue to believe Costco's unique, membership- based business model, wide and sustainable competitive moat, strong return on capital, healthy balance sheet ($11 cash per share) and consistent execution all contribute to its scarcity value in retail -- and associated premium valuation."
Exclusive Look Inside:
You see Jim Cramer on TV. Now, see where he invests his money and why Costco is a core holding of his multi-million dollar portfolio.
Want to be alerted before Jim Cramer buys or sells COST? Learn more now.
Year-to-date return: 1%
Credit Suisse's Target Price: $130
McDonald's (MCD - Get Report) operates and franchises McDonald's restaurants in the U.S., Europe, the Asia/Pacific, the Middle East, Africa, Canada and Latin America. The company's restaurants offer various food products, soft drinks, coffee and other beverages.
Credit Suisse Said: "We came away from 4Q with higher conviction that management can execute on its multi-initiative turnaround plan. While we estimate that All-Day Breakfast (ADB) may be adding ~2-3% to same-store sales, U.S. comps began to accelerate prior to the rollout of ADB.
"We expect the U.S. business to sustain momentum as management refines and expands the 'McPick' value platform and continues to benefit from operational improvements, breakfast, and easy compares.
"The mobile app (still in early stages) and remodels (only 130 U.S. 'Experience of the Future' stores) represent long-term opportunities to drive comps. MCD has seen sustained periods of higher SSS in the past, and the brand is clearly in recovery mode. As such, we are still believers in our bull case model of ~$6.50 in 2017 EPS, which could lead to an approximate $140 stock price."
Industry: Consumer/Retail Food & Drug
Year-to-date return: 4.1%
Credit Suisse's Target Price: $80
Credit Suisse Said: "DG continues to represent one of the most attractive investments in staples retail, particularly in the current environment. Visibility on base case earnings growth in the low teens looks good, paced by low single digit comps, 7% square footage growth, stable margins, and an aggressive share repurchase program.
"That being said, DG also offers a defensive growth angle as the company typically gains share as the U.S. consumer weakens.
"Overall, we believe it's difficult to find investment ideas poised to deliver under multiple macro backdrops. While the stock has outperformed recently, its valuation still leaves plenty of room for additional upside."
Industry: Consumer/Packaged Food
Year-to-date return: 4.6%
Credit Suisse's Target Price: $82
Kellogg (K - Get Report) manufactures and markets ready-to-eat cereal and convenience foods. The company's principal products include ready-to-eat cereals and convenience foods, such as cookies, crackers, toaster pastries, cereal bars, fruit-flavored snacks, frozen waffles and veggie foods, as well as health and wellness bars, and beverages. It offers cereal products under the Kellogg's brand name; and cookies, crackers, crisps, and other convenience foods under the Kellogg's, Keebler, Cheez-It, Murray, Austin, and Famous Amos brands.
Credit Suisse Said: "We believe Kellogg represents the best risk-reward in our space.
"The savings from restructuring and ZBB provide unique visibility into 7-9% EPS growth and management is exhibiting a new level of urgency that we have not seen in many years, which could be a function of outside pressure or merely impatience on the part of the board. In addition, cereal category scanner data is showing consistent sequential improvements and we expect Kellogg's cereal business to grow in 2016 thanks to innovation in Special K and Kashi.
"The stock trades at a valuation discount to peers on a PE basis and has almost zero support from the sell side. We think there is plenty of runway for positive ratings revisions as the market re-evaluates Kellogg's potential to return to its blue-chip status."
Industry: Consumer/Apparel & Footwear
Year-to-date return: -1%
Credit Suisse's Target Price: $36
Hanesbrands (HBI - Get Report) designs, manufactures, sources and sells various basic apparels for men, women and children in the U.S. It sells bras, panties, shapewears, hosiery, men's underwear, children's underwear and socks; and other activewear, such as T-shirts, fleece, sport shirts, performance T-shirts and shorts, sports bras, and thermals, as well as licensed logo apparel in collegiate bookstores and other channels.
Credit Suisse Said: "Strong and steady free cash flow generator with opportunity to catalyze EPS growth via acquisitions and mix shift towards premium priced products."
Industry: Consumer/Homebuilding & Building Products
Year-to-date return: -11.5%
Credit Suisse's Target Price: $43
Caesarstone Sdot-Yam (CSTE - Get Report) and its subsidiaries manufacture and sell engineered quartz surfaces under the Caesarstone brand in the U.S., Australia, Canada, Israel, Europe and internationally. The company's products is engineered quartz slabs, which are used as kitchen countertops in the renovation and remodeling, and residential construction end markets, as well as other applications, including vanity tops, wall panels, back splashes, floor tiles, stair and other interior surfaces that are used in various residential and non-residential applications.
Credit Suisse Said: "We expect significant revenue and EBITDA growth over the next several years driven by share gains for engineered quartz countertops and for CSTE specifically within the category, given its significant U.S. manufacturing capacity expansion and increasing brand recognition.
"Additionally, this should be supported by continued improvement in home sales and prices, which should lift home improvement spend (90% of end market exposure)."
Year-to-date return: 0.85%
Credit Suisse's Target Price: $140
Credit Suisse Said: "MTN continues to build off of their robust pricing power and focus on margin improvement. We see potential upside from the integration of PCMR/Canyons (first year of full integration), tuck-in acquisitions, as well as their capital allocation strategy. As MTN continues to roll up regional assets, we believe there is upside to its EPIC pass sales and pricing power."