• The Consumer Services segment of the economy continues to heal from very depressed levels
• The leading Consumer Services brands have tremendous tailwinds
• Most investors do not own a dedicated allocation to Consumer Services stocks. Now is the time to add to this exposure
As the chart above shows, the Consumer Goods category (blue) has been the driver of U.S. GDP over the last year. Many of the best brands that dominate these industries have shown incredible resilience during difficult times and their stocks have performed very well. At this point though, tailwinds are likely turning into headwinds from valuation and year-over-year comparison perspectives.
In my opinion, this group has carried the consumption component of GDP as far as it can, and the real opportunity continues to be in the recovery of the Consumer Services segment (yellow) of the economy. Services fell off a cliff in Q2 of 2020 for obvious reasons and with vaccinations and boosters continuing to be adopted, lockdown fatigue and a move towards ultimate herd immunity, the mean reversion in the services sector should accelerate even faster.
The desire for normalcy should keep consumers focused on services after they have binged on goods consumption for the last 18 months. My team and I are focused on finding the best potential winners for 2022 and many of them will likely come from the services sector.
Opportunity in Recreation, Travel, Experiences and Personal Services
The chart above spells out a wonderful investment opportunity for astute investors: Services such as live entertainment, sporting events, concerts, air travel, lodging, amusement parks, gyms and ground transport are still depressed relative to long-term norms.
However, in order to identify specific opportunities, one must do some additional work. Because of massive fiscal and monetary stimulus, many of these stocks are already trading well above their 2020 peaks. Additionally, some companies (travel stocks in particular) have had to raise tons of debt just to survive the pandemic. Significant levels of debt often act like an anchor to a company’s potential growth and add risk to the business if they cannot grow their way out. My team and I have been doing rigorous research to identify the brands that have the best snap-back opportunities. We are particularly interested in those that do not have excessive debt that may curtail forward growth.
It’s important to remember that some great businesses will use any lift in their stock prices to raise capital to pay off near-term debt. Short-term, that could be dilutive to shareholders, but it will ultimately help these companies reduce debt and re-invest back into the business to re-build their workforce and offer consumers better experiences. We couldn’t be more excited to be investing in some very relevant brands across the services and experiences segment of the economy.
The Tailwinds are Clear
We must keep in mind how the consumer behaves in normal times. In so doing, we are able to jump on short-term anomalies as mean reversion opportunities. As the chart above shows, the services component of personal consumption remains below January 2020 levels. We have no doubt that the services sector will continue to heal.
This reversion to normalcy presents a wonderful opportunity for investors.
Disclosure: This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.