Is the stock market open on Labor Day?
Although the stock market is closed for Labor Day, offering investors an extended weekend and reprieve from some of the uncertainty and initial turbulence that kicked off the month of August, it also allows investors to consider stocks that may perform well late in the year.
Historically, stocks have generally risen from Labor Day through the end of the year. According to Dow Jones Market Data:
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S&P 500: Rose 70% of the time, averaging a 2.8% increase
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Dow industrials: Rose 72% of the time, gaining 2.7% on average
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Nasdaq Composite: Rose 68% of the time, by an average of 3.4%
The S&P 500 experienced some of its most robust finishes in the late 1990s, and as consumer confidence rises following an impressive end to the month of August, consumer discretionary stocks may offer potential upside as the holiday season approaches.
Consumer Confidence Rises in August
In August, the Consumer Confidence Index reached a six-month high, with sentiment rising to 103.3, up from 101.9 in July. The increase was driven by positive views on the economy, despite some concerns about the job market. This improved sentiment, coupled with the anticipation of potential interest rate cuts by the Federal Reserve, could fuel consumer spending in the coming months.
Confidence remains below pre-pandemic levels due to higher living costs and lower job growth. There were also divides based on age and income level; younger survey respondents and lower-wage earners expressed declines in confidence. Despite some mixed signals from the survey, the overall uptrend could positively affect the consumer discretionary sector, as consumers might be more inclined to spend money on non-essential goods and services in the coming months.
Consumer Discretionary Sector: Yield Characteristics
The consumer discretionary sector is not as high-yielding as other sectors, such as consumer staples or utilities. Demand is more elastic for consumer discretionary goods and services, and dividend yields tend to rise and fall with the economic cycle. During downturns, companies are more likely to cut dividends to preserve cash. While yield is not as high, there are pockets of moderate yield that can be found within the sector. The sector also displays higher dividend growth rates relative to other higher-yielding sectors.
With improving consumer sentiment and interest rate reductions slated for September, income-focused investors with an eye toward sector diversification may find an opportunity within the consumer discretionary sector.
Top Dividend-Paying Consumer Discretionary Stocks
SA Quant has identified three consumer discretionary stocks that score highly across Factor Grades, and offer dividend yield. Factor Grades rate investment characteristics on a sector-relative basis. Each of the stock picks trades at a relative discount to the sector, offers solid growth, profitability, incredible momentum, and Wall Street analysts are optimistic about their outlook.
In addition to these criteria, the following metrics were also applied to the stock screen:
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1. Market capitalization > 500M
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2. Stock price >$2.00
Note that because these stocks were holistically evaluated across factor and dividend grades, they do not represent the highest-yielding consumer discretionary dividend stocks. Rather, they display high factor grades, offer dividend yield, and maintain a quant “Strong Buy” recommendation.
1. GAP, Inc. (GAP)
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Dividend Yield: 2.67%
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Quant Sector Ranking (as of 8/29/24): 6 out of 504
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Quant Industry Ranking (as of 8/29/24): 2 out of 37
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Market Capitalization: $8.41B
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Quant Rating: Strong Buy
GAP is a global retailer with a diverse portfolio of apparel brands, including Banana Republic, Old Navy, and Athleta. It is one of the largest retailers in the US, with over 2,500 directly managed stores and 1,000 licensee-operated brick-and-mortar stores. The company also offers a robust e-commerce platform, catering to a wide range of consumers with different apparel preferences and levels of discretionary income. In recent years, the company has differentiated itself through sustainability initiatives, as well as customer loyalty programs.
GAP’s share price has risen dramatically on a trailing 1-year basis, delivering 105.41% in returns. In Q2 2024, the company reported $3.7B in net sales, which amounts to a 5% year-over-year, and 59% increase in EPS from $0.32 to $0.54.
Despite the gains made in the last year, GAP remains undervalued. It is currently trading at 12.60x forward earnings, which is a 24.15% reduction to the sector median, while its price-to-sales figures are also priced at discounts relative to the market. The company also stands out from a momentum standpoint, as its price performance has crushed the broader market on a trailing 1-year basis, outpacing the S&P 500 by 81.08%.
GAP’s forward dividend yield is currently 2.67%, which trends above the sector median. It also offers a 3Y CAGR dividend growth rate of 18.29%. The company’s dividend payout ratio also trends below sector medians, suggesting that GAP’s current dividend is sustainable and will be able to continue offering its current level of dividend yield. GAP currently offers investors strong value and momentum alongside its dividend.
2. H&R Block, Inc. (HRB)
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Dividend Yield: 2.34%
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Quant Sector Ranking (as of 8/29/24): 13 out of 504
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Quant Industry Ranking (as of 8/29/24): 2 out of 12
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Market Capitalization: $8.94B
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Quant Rating: Strong Buy
H&R Block is a tax preparation and financial services provider targeted towards individuals and small businesses. Their service offerings include in-person tax preparation, do-it-yourself tax software, and online tax filing. In recent years, HRB has worked to expand its digital presence to compete with leading online tax preparation service providers. HRB has further diversified its revenue sources by moving into the mobile banking. The company launched its platform Spruce in 2022, which has accrued nearly $1B in customer deposits as of Q2 2024.
The company has delivered a 30.03% return in the 6-month period, with 11.20% of gains made in the last month. The company’s price momentum is reflected in its momentum factor grades. Despite the momentum, HRB is still able to offer investors value by trading at favorable forward earnings ratios.
HRB scores well in profitability, posting above-average grades for most indicators. Both its gross profit margin and EBITDA margins score well above sector medians. EBITDA grew to $963M, which represents a 5.44% increase year-over-year.
While HRB’s yield grade is average, it scores highly in terms of dividend growth and safety. The company’s commitment to shareholders was mentioned in its Q22024 earnings call, where it highlighted its recent dividend increases and share repurchases.
“As Jeff shared, our capital allocation story remains strong. Regardless of year-to-year nuances, our disciplined approach drives meaningful value for shareholders. We produce significant and stable cash flow, pay a growing dividend, and buy back a material number of shares. We also today announced a 17% increase in our quarterly dividend to $37.5 per share. Since 2016, we’ve increased the dividend by 88%. In FY ‘24 we completed $350 million of share repurchases at an average price of $43.66; and today we are pleased to announce a new share repurchase authorization of $1.5 billion. Since 2016, we have repurchased more than $2.3 billion, retiring over 89 million shares, or more than 40% of shares outstanding at an average price of $26.74, ” said Tony Bowen, H&R Block CFO.
HRB’s combination of positive momentum, profitability, and dividend growth make it a solid consumer discretionary stock with income opportunities.
3. Meritage Homes Corporation (MTH)
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Dividend Yield: 1.52%
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Quant Sector Ranking (as of 8/29/24): 11 out of 504
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Quant Industry Ranking (as of 8/29/24): 4 out of 24
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Market Capitalization: $7.16B
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Quant Rating: Strong Buy
Meritage Homes Corporation is a leading American homebuilder that designs, constructs, and sells single-family homes. The company operates primarily in the sunbelt, focusing on high-growth areas where resale inventory is low. The company places an emphasis on innovative design, energy-efficient homes, and prioritizes the pace of sales over price with a 60-day closing guarantee.
MTH has strong growth targets. In Q2, it acquired 8,700 new lots, representing 63 future communities to meet double-digit net community growth count in 2025.
MTH scores well across Factor Grades. MTH increased sales by 14% year-over-year and also increased home revenue by 18%, aiding its A+ Growth Grade. It beat revenue estimates by $134.6M and revised diluted EPS estimates by 26% year-over-year. MTH’s valuation metrics are also attractive, trading at ~40% reduction to sector medians for both TTM and forward-looking earnings estimates. MTH’s momentum is strong, delivering strong price performance across multiple periods.
MTH has grown its dividend significantly, nearly tripling year-over-year in 2024. It also scores highly across several dividend safety metrics, emphasizing its ability to continue paying dividends at the current rate. MTH is a company with strong growth and momentum, which has the potential to be further reflected in its dividend level.
Concluding Summary
The consumer discretionary sector is poised to experience tailwinds based on the recent consumer confidence data and potential interest rate reductions at the September 18th FOMC meeting. The combination of cooling inflation, rate reductions, and increased confidence could all act as catalysts for increased consumer spending on non-essential goods. While the sector is not known for its dividends, there are pockets of dividend growth to be found.
SA Quant has identified well-rounded consumer discretionary stocks that offer investors a modest yield alongside the potential for capital appreciation in the increasingly optimistic consumer environment. Gap Inc., H&R Block Inc., and Meritage Homes Company are all rated “strong buys” based on SA factor grades, and their ability to provide investors with dividend yield.
We have many stocks with strong buy recommendations, and you can filter them using stock screens to suit your specific investment objectives. Consider using Seeking Alpha’s ‘Ratings Screener’ tool to help find stocks that achieve diversification into desired sectors you like. Alternatively, if you’re looking for a select number of Quant Strong Buy recommendations on a monthly basis, you might want to explore Alpha Picks.
(Except for the headline, this story has not been edited by PostX News and is published from a syndicated feed.)