The strong year-to-date performance of consumer discretionary stocks through Q3 hasn’t prevented Fidelity Portfolio Manager Jordan Michaels from finding companies in the sector with attractive valuations, favorable business prospects, company-specific advantages, and the potential to gain significant market share.
“These are all attributes that nicely align with my investment strategy and my focus on companies whose business quality or prospects seem underappreciated by the market,” says Michaels, who manages Fidelity® Select Consumer Discretionary Portfolio (FSCPX).
Five top overweight positions at the end of September—TJX Companies (TJX), Hilton Worldwide (HLT), Lowe's (LOW), Dollar Tree (DLTR), and Dick's Sporting Goods (DKS)—all exemplify the attractive valuations Michaels says he’s finding across the sector, despite its strong recent run. Consumer discretionary stocks have gained more than 24% through the first nine months of the year, well ahead of the broader equity market.
He likes Hilton’s exposure to the ongoing recovery in travel and the superior value proposition it provides to hotel owners. “I see Hilton gaining market share by signing on additional hotel partners, even in the event of a potential slowdown in new development,” says Michaels.
Michaels cites the off-price channel, especially TJX, as becoming increasingly important to vendors as it gains market share, particularly with excess inventory following a prolonged period of supply-chain disruption.
He’s also remained bullish on Lowe’s, which he thinks has made operational improvement, and Dick’s, whose competitive position has considerably improved with enhanced vendor relationships. In sharp contrast to many of its competitors losing access to product, Dick’s is aligned with its primary vendors, which view the retailer as a key strategic partner for physical distribution, given its superior ability to bring product to life, according to Michaels.
Lastly, Michaels says Dollar Tree offers an attractive customer value proposition amid a challenging consumer environment, including elevated inflation. Moreover, he likes the numerous operational improvement initiatives underway at the company.
Describing this handful of stocks, Michaels notes their favorable risk/reward profile, given the prevailing economic uncertainty amid persistent inflationary pressure, as well as higher interest rates and borrowing costs. “They exhibit upside potential while benefiting from some of the more defensive aspects of these businesses,” he says.
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Jordan Michaels is a research analyst and portfolio manager in the Equity division at Fidelity Investments.
In this role, Mr. Michaels manages Fidelity Select Construction and Housing Portfolio, the consumer discretionary sleeve of Fidelity and Fidelity Advisor Stock Selector Large Cap Value Funds and covers specialty retail. He is also manages Fidelity Select Consumer Discretionary Portfolio, Fidelity Advisor Consumer Discretionary Fund, and Fidelity VIP Consumer Discretionary Portfolio.
Previously, he was a high yield research analyst covering building materials, retail, automobiles, and metals/mining
Prior to joining Fidelity in 2008, Mr. Michaels was an intern at GID Securities. He has been in the financial industry since 2006.
Mr. Michaels earned his bachelor of arts in economics from Brandeis University. He is also a CFA® charterholder.