The consumer discretionary sector is where great luxury items are born. If it’s a want but not a need, it’s likely a consumer discretionary product: athletic apparel, electric vehicles, hotel rooms, restaurant meals, cruises, and consumer electronics all make up this dazzling market sector.
Consumer discretionary companies can be a significant driver of economic growth but also a heavy drag when consumers limit spending during tough economic times. For this reason, consumer discretionary stocks often go through bullish periods of eye-watering gains, followed by price corrections and vertiginous drops in valuation.
Below we’ll look at some top opportunities in Canada’s consumer discretionary sector and see if these stocks have a place in your portfolio.
Related: List of companies in the TSX consumer discretionary sector
What are consumer discretionary stocks?
Consumer discretionary stocks are companies that produce products we want but don’t need. They’re often contrasted with consumer staple stocks, which are companies that produce products we do need, like food and water.
Consumer discretionary stocks are diverse and often so different from each other that it’s hard to see them lumped under the same market sector. These companies are typically categorized under four sub-industries:
- Automobiles and components
- Consumer durables and apparel, such as furniture, electronics, appliances, apparel, footwear, and textiles
- Consumer services, such as hotels, restaurants, casinos, cruise lines, travel booking companies, and leisure facilities
- Retail stores
Consumer discretionary stocks are usually sensitive to macro shifts in the economy. During strong years, these companies might have an influx of cash, as consumers may be more willing to buy nonessentials. The opposite may happen during economic downturns: consumers might buy fewer luxury products, causing companies in this sector to report slower revenue growth, fewer sales, and narrower profit margins.
Top consumer discretionary stocks in Canada
Consumer discretionary stocks in Canada include some favourite household names, like Canadian Tire, Dollarama, and Lululemon. Below are some of Canada’s top-performing sub-industries of this market sector.
Top automotive stocks
Automotive companies in Canada design and manufacture parts for anything that moves: cars, space shuttles, fire trucks, school buses, tractors, lawnmowers, among others. They can also include companies that make cars, such as Tesla and Ford.
| Automotive stocks | Description |
| Magna International (TSX:MG) | Global manufacturer of automotive parts |
| Linamar (TSX:LNR) | Parts manufacturer for automotive, aerospace, and agricultural industries |
| Uni-Select (TSX:UNS) | Distributor of aftermarket parts and tools |
Top electric vehicle stocks
Electric vehicle stocks are those companies that specialize in EV transportation. They can include companies that make cars for consumers, such as Tesla, or those that make parts for lithium-ion batteries.
| Electric vehicles stocks | Description |
| Lion Electric (TSX:LEV) | Manufacturer of all-electric buses and trucks |
| NFI Group (TSX:NFI) | Producer of zero-emission buses (ZEBs) |
Top restaurant stocks
Restaurant stocks are companies that own the right to franchise certain restaurant brands. For example, Restaurant Brands International is the franchise holder of Burger King, Tim Hortons, Popeyes Louisiana Kitchen, and Firehouse Subs, whereas McDonalds owns the right to franchise specific restaurants.
| Restaurant stocks | Description |
| Restaurant Brands International (TSX:QSR) | One of the largest restaurant companies in the world |
| MTY Food Group (TSX:MTY) | Franchisor of quick service and casual dining |
| Recipe Unlimited (TSX:RECP) | Restaurant companies with a large portfolio of restaurants, such as Swiss Chalet, New York Fries, and Harvey’s |
Top retail stocks
Retail stocks are companies that sell products directly to consumers. We often think of retailers as operating in brick-and-mortar stores, but they can also be e-commerce companies.
| Retail stocks | Description |
| Lululemon Athletica (NASDAQ: LULU) | Global athletic apparel company |
| Canadian Tire (TSX:CTC.A) | Major retailer that sells home goods, apparel, hardware, automotive parts, and sporting equipment |
| Aritzia (TSX:ATZ) | Global fashion company |
Top travel stocks
Travel stocks are companies that specialize in tourism, such as hotels, airlines, and booking companies.
| Travel stocks | Description |
| Air Canada (TSX:AC) | Largest airline in Canada, providing service to over 50 million people |
| American Hotel Income Properties REIT (TSX:HOT.UN) | REIT that manages luxury hotels, including the Marriott and Hilton |
Pros and cons of consumer discretionary stocks
Pros
- Well-known brands. The best consumer discretionary stocks are household names, such as Lululemon, Walt Disney, and Nike. Even during slow economies, these large caps will likely have substantial cash to stay afloat.
- Strong contenders during periods of economic growth. When the economy is booming, consumers want to buy things – often things they don’t need. As a result, consumer discretionary companies may report higher revenues, stronger earnings, and more profits.
Cons
- The sector is cyclical. Consumer discretionary stocks are sensitive to economic cycles of growth and recession. They typically don’t retain value during recessions or downturns and can quickly wipe out gains earned during their best months.
- Competition is fierce. Retailers are often fighting neck-in-neck to gain more market share.
- Consumers can change. The greatest threat to consumer discretionary stocks is a change in consumer behaviour. The recent “retail apocalypse” – the closing of brick-and-mortar stores in the face of rising e-commerce – exemplifies how quickly former household names can be put out of business.
Should you invest in consumer discretionary stocks?
Many great stocks in Canada fall under the consumer discretionary sector. But whether they’re suitable for your portfolio depends on your risk tolerance and investment goals.
In general, these stocks are ideal for investors who are okay with high volatility and can hold onto great picks over the long term. If you can stay strong when the stock market is underperforming your expectations, exposing a small portion of your portfolio to this sector could bring you some gains during boom years.
If you’re the kind of investor who doesn’t cope well with volatility, consumer discretionary stocks may not be the right fit for you. Instead, you might want to consider an exchange-traded fund (ETF) that tracks an index of consumer discretionary stocks. A share in an ETF can help you diversify instantly and won’t expose you to the same risk as investing in stocks individually.