By Jacob Sonenshine

Consumer stocks are down, but not out. A handful look like buys now.

The latest blow came on Wednesday when bond yields popped -- and the Consumer Discretionary Select Sector SPDR Fund and the SPDR S&P Retail Exchange-Traded Fund fell 2% and 3.1%, respectively. The S&P 500 dropped 1.6%. Higher yields make borrowing money more expensive, which reduces consumer spending.

Both funds had been on a rough stretch before Wednesday because of Wall Street's unease about the consumer companies' earnings. The higher bond yields are making investor sentiment worse, after what's been a steep drop in consumer confidence because of tariffs, which make good and services more expensive. For the year, the broader consumer discretionary ETF is off 4.5% and the retail ETF is down 5.4%. The S&P 500 has dropped only 0.5%.

The silver lining is that there are select stocks that not only trade at cheaper prices now, but are also positioned for high earnings growth. Buying them right now makes sense.

Citi strategist Scott Chronert looked for the ones to scoop up. He screened for consumer companies with sales that are relatively less sensitive to changes in broader economic activity, and have invested heavily in their businesses to spark high growth.

Chronert started with 280 consumer stocks. He had two criteria for companies: sales less correlated to gross domestic product activity in recent years and capital expenditures that represent a relatively large ratio to annual depreciation expense. The second criteria is important because, as long-term assets depreciate, companies that are replacing those assets -- and adding more -- are signaling that they're prepared for ever-higher demand because they're aggressively growing.

Names on the screen are Amazon.com, Costco, Tractor Supply, Procter & Gamble, Kroger, and Domino's Pizza.

Another is Walmart. It's a rare retailer whose total sales aren't so sensitive to changes in consumer demand because the majority of its sales come from groceries.

The discount chain has plenty of growth potential: Its total capital expenditures in the past five years, including analysts' estimates for this year, are $95 billion, about 1.6 times total depreciation expense in that period. So for every dollar of asset value lost, Walmart invests more than a dollar to increase its asset base. It's beefing up its capabilities for buy-online-pickup-in-store, e-commerce, and advertising.

The idea is to add revenue streams and gradually take business from other retail outlets. That's why, after sales surpassed expectations in the first quarter, analysts expect just over 4% sales growth annually over the next three years to $768 billion, according to FactSet. That's nothing to scoff at for an already-large retailer that's outperforming other retailers. Target, for example, saw sales decline in the first quarter.

Walmart's sales growth can nudge profit margins higher, which analysts forecast. If it needs to raise prices it can, though most of the growth in the first quarter came from more purchases rather than higher prices. As the advertising business ramps up, it can contribute to higher margins since the ad business generally has lower costs versus retail.

Plus, Walmart is buying back stock every quarter, helping push analysts' EPS growth projections close to 10% annually.

That can bring the stock higher, assuming shares aren't priced too expensively. They trade at what appears on the surface to be an expensive just over 35 times expected earnings for the coming 12 months. But at just over twice the retail fund's 14.8 times, it's about in line with the type of premium it has tended to fetch over the past couple of years, given its consistent earnings and growth trajectory.

Walmart is a textbook example of a winning consumer stock right now. So are the other seven.

Just remember: Consumer stocks aren't all the same. Take a look at a company's potential before you walk away.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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May 22, 2025 14:00 ET (18:00 GMT)

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