3 Stock Themes We Like

Jul. 28, 2022

Today, we are sharing a couple trends in the consumer goods sector that we think present attractive investment opportunities. As an active manager, we are constantly evaluating companies and industries that could make a good fit for one of three investment strategies.

But first, how do we decide what investment opportunities are proper fits for our strategies? Analysts in our sector groups have ample leeway to research and evaluate a broad set of companies and to recommend an idea to the portfolio management teams – should it fit our qualitative and quantitative thresholds. Our bottom-up investment process enables our analysts to focus entirely on identifying securities that are likely to outperform. With this process, the following three areas caught our eye.

The Beauty in This Trend

Influencers and social media trends have reignited the beauty industry in recent years. While beauty companies once dominated department store counters and drugstore aisles, many companies have sized on the ‘digitalization of everything’ theme and are capitalizing on new growth opportunities in the process.

The companies that were able to identify these trends ahead of time have been able to reap the benefits of the first mover advantage. Early adopters have not only survived the transition, but have been able to access new markets, including China and other regions. For example, beauty products can be found anywhere from hair salons, mass-market branded retail, and perfume shops, to pharmacies, drugstores, and medi-spas, setting the stage for stronger brand recognition and reach going forward.

In today’s digital age, scale is a huge advantage for incumbents over new entrants. Those beauty brands able to simultaneously invest in e-commerce and distribution—ultimately broadening and internationalizing their offerings—while successfully defending their existing, legacy sales verticals, are well positioned ahead. When it comes to beauty sales, there’s beauty in both the new way and the old.

Did They… Do It?

Sneakerheads and workout apparel enthusiasts unite under one mindset: performance over anything else. And it’s clear that years of brand equity and successful on field results have allowed the biggest apparel giants to build loyal followings on top of seemingly endless growth in athletics.

The industry has many attractive characteristics including growth, strong brand recognition, and attractive returns. The largest of these companies have immense scale, creating greater capacity for innovation, advertising, and athlete-influencer partnerships. And more importantly, many names in this space have a demonstrated history of strong margins, sustainable cash generation, and a willingness to return capital to shareholders.

The recent market selloff has created an opportunity to buy into this attractive trend. While supply chain disruptions and/or weaknesses in the Chinese market may present potential hurdles ahead, these concerns appear transitory. Behind it all are a variety of attractive opportunities to buy into long-term category winners.

The Dollar Doesn’t Fall from the Tree

It’s been well-documented that inflation is high, and what comes with inflation? Mindful shopping habits and a tendency for the consumer to stretch the dollar by looking for cheaper alternatives. Historically, dollar stores have been key beneficiaries of trade down behavior.

These small-box discount variety stores sell small ticket items with a heavy tilt toward consumables. They capitalize on competitively priced merchandise thanks to a flexible business model crafted around maintaining target margins. For consumers, this translates to the steady pricing they’ve come to know, expect, and count on.

These retailers were infamously known for its $1.00 price tags, recently increased to $1.25, and the vast majority of products are still priced at less than $10. Given that our economic outlook is that a recession could be on the horizon, we believe dollar stores are well positioned to benefit through what could be a challenging road ahead for the consumer.

At the end of the day, these three themes are simply a peek into the research and analysis we put into each and every decision and how we are positioning our portfolios for the future.

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