Dogecoin: the ultimate penny stock 🐕

by Investing Reimagined

Hi, nice to see you

Bad Bunny at Wrestlemania this week was the energy we didn’t know we needed

In this newsletter:

  • 5 headlines that pretty much sum up the week
  • The [bleak] future of shopping malls
  • Investing guide for consumer stocks
  • Our rec of the week

This happened...

Five headlines that sum up the week 🚀 📈

1. The Dow broke 34,000

With jobless claims falling in the last week and strong corporate earnings from JP Morgan and Morgan Stanley, the Dow and S&P shot up to record-breaking territory. The Nasdaq, which didn’t have as noteworthy of a week, is still in the green for the week.

2. Dogecoin surged 400% in the last week

Once started out as a joke, Dogecoin is now worth over $40 billion. In the last day, “the people’s crypto” has added over $20 billion to the cryptocurrency – each digital token costing around $0.32 each. Many are tying the rally to Coinbase’s IPO, which has also resulted in other well known cryptocurrencies, Bitcoin and Etherium, to see surges in value. Others credit Elon Musk, who called it his “fav” cryptocurrency and Tweeted this on Thursday:

3. Microsoft is acquiring AI Company Nuance for $16 Billion

Nuance Communications, which currently trades for $53 a share, has reached an agreement with Microsoft that will, after debt, hold an enterprise value of $19.7 billion. It’s the second-largest acquisition to date for Microsoft – the largest being LinkedIn for $26.2 billion. Nuance works primarily with healthcare and enterprises, offering voice recognition systems and biometric security capabilities. This lines up with Microsoft’s initiative to improve the healthcare industry through Microsoft’s Cloud for Healthcare. Read More

4. Grab announces plans to go public on Nasdaq via SPAC Deal

Singapore-based Grab Holdings will go public in the U.S. with the help of a special purpose acquisition company (SPAC), Altimeter Growth Corp. Grab offers ride-hailing and food delivery services – similar to Uber, which is also backed by Softbank, as well as a digital wallet. It is considered to be Southeast Asia’s most valuable startup.

5. Coinbase is now a publicly traded company

It’s been an incredible week for cryptocurrencies, starting with Coinbase’s historic stock market debut. The largest direct listing to date, some analysts project its valuation to exceed $100 billion. Since Wednesday, its share price has fallen from $381 to $351. Although it’s trading lower than its opening price, it’s still considered a strong buy for long-term investors and has already been added to Renaissance IPO ETF.

ICYMI: Malls could close by 2025

Just like with movie theaters, the future of shopping malls is not a guarantee just because some people enjoy the novelty of it. And that is exactly that it has become for many: a novelty. With retailers pivoting to ecommerce, shoppers now have access to faster shipping, an increasingly personalized online experience and the convenience of never leaving home.

The pandemic has had rippling effects on brick and mortar. According to the Washington Post, department store sales have plunged by more than 40%. Several well-known retailers like Neiman Marcus and JC Penny were forced to file for bankruptcy. 

According to commercial real estate firm Green Street, almost 200 department stores have closed its doors permanently in the last year. By the year 2025, another 800 is expected to disappear.

While these numbers indicate a struggle, that doesn’t necessarily mean that retail as a whole isn’t doing well. In fact, retail spending increased in March by 9.8%. With stimulus checks boosting consumer spending, coupled with our desire to purchase something other than $60 sweats, it won’t be long before retail spending reaches pre-pandemic levels. It just won’t be as heavily sourced from in-person shopping. 

Today I learned...

The many benefits that come with investing in consumer stocks

TL;DR

  • Consumer stocks are offered by companies that produce or sell everyday goods.
  • There are two types: staple stocks sell items that consumers can’t (or won’t) forgo in their budget (such as groceries and personal care items), while discretionary stocks sell items that aren’t necessary (such as entertainment, cars, and fast food).
  • Typically, investors use consumer staple stocks as part of a defensive investment strategy in downturned markets, or to diversify their portfolios. By contrast, discretionary stocks can be part of short- or long-term strategies to boost earnings.

Apple.

Coca-Cola.

General Mills.

Chegg.

What do these four securities have in common? They’re all examples of consumer stocks.

Consumers stocks are issued by businesses that produce or sell products that the everyday person purchases regularly. There are two categories of consumer stock, both with their own challenges, benefits, and pricing cycles.

We’ll discuss the similarities and differences between both types of consumer stocks and the biggest names in consumer securities to consider adding to your portfolio.

What is a Consumer Stock?

When we say, “consumer stocks,” we’re talking, broadly, about the goods that you need or want on a regular basis. We can divide this group into two types: consumer staples and consumer discretionary goods.

Consumer staples are the items you can’t (or won’t) live without, regardless of your financial situation. Common examples include groceries, alcohol and tobacco, personal care items, and household necessities. Companies that work in the farming and pharmaceutical industries also fall under this umbrella.

Consumer discretionary goods are the items that are quasi-essential but not absolutely necessary. These include items such as computers, entertainment, cars, and fast food. Some industries that produce goods required for modern living, but not for life, also belong in the discretionary category. (Clothing manufacturers are one such example.)

Why Invest in Consumer Stocks?

Consumer stocks of both stripes can provide unique benefits to an investors’ portfolio, in part because of when they peak in the broader economic cycle.

As a rule, consumer staples are non-cyclical, which means they’re always in demand

  • Because most people can’t (or won’t) cut these items from their budgets, staple industries are nigh on impervious to price elasticity and broader business cycles
  • During periods of recession or sluggish growth, consumer staple spending may slow – but it won’t grind to a halt
  • Some periods of recession have seen consumer staple stocks leapfrog ahead of more exciting industries

Consumer discretionary stocks, on the other hand, are cyclical securities, which means they respond to economic cycles. 

  • As a rule, consumers worried about their finances spend less on frivolity, while consumers secure in their financial situations are more likely to splurge
  • In periods of economic downturn, consumer discretionary spending often spearheads the broader market decline
  • This leads to car companies, clothing conglomerates, and the entertainment industry slowing, or even experiencing negative growth. When the market expands again, discretionary stocks lead the charge into recovery.

Big Names in Consumer Securities

When it comes to big names in consumer securities, we’ve already listed a few – Apple, Coca-Cola, and General Mills among them. And while Chegg isn’t an enormous company, we thought it worth including due to the massive shift in online learning over the last year.

Big Names in Consumer Stocks

Now, let’s take a closer look at some of the biggest names in consumer investments (and their 2020 performance):

  • Apple, Inc – a behemoth among consumer discretionary stocks with a market cap of $2.22 trillion. The stock started 2020 at $74 a share before plummeting to just under $56 per in mid-March – and ended the year on a $135 high.
  • Coca-Cola Co – commands a health $229 billion market cap in the consumer staple market. The beverage corporation began 2020 at $55 and ended at $54 after hitting a $36 low in the interim.
  • Chegg, Inc. – an up-and-coming discretionary stock with a sizeable market cap of $12.5 billion. It began 2020 at a piddly $38 – and doubled to $89 and change in eight months, more than bouncing back from its $26 mid-March low.
  • General Mills, Inc. – worth just under $37 billion in shares, despite coming out just $6 up between January and December 2020 (from $53 to $59). Still, it outperformed Coca-Cola!

  • Procter & Gamble Co – owns dozens of brands, including Crest, Gillette, and Dawn, and is worth nearly $334 billion as a consumer staple stock. PG started 2020 at a healthy $124.50 per share and ended just under $139 – after rebounding from a March low of $94.
  • Best Buy Co., Inc – one of 2020’s success stories. As a brick-and-mortar electronics retailer, they saw their market cap grow to $30 billion, with shares jumping from $88 to over $101 in the midst of a pandemic, over double their March low of $48.

Big Names in Consumer ETFs

While we’re naming the big fish, let’s quickly cover some of the biggest consumer ETFs, as well.

The Consumer Staples Select Sector SPDR ETF (XLP) tracks the Consumer Staples Select Sector Index. As a result, it offers broad exposure to the consumer staples sector, and is the largest consumer staples ETF with over $10.8 million in total assets. As you can see, XLP has significantly underperformed the S&P 500 Index for the majority of the last five years:

XLP 5-year Performance Compared to S&P 500 Index (Image Credit: CNBC)

The Vanguard Consumer Staples ETF (VDC) tracks the MSCI US Investable Market Consumer Staples 25/50 Index. It offers targeted exposure to over 100 stocks in the U.S. consumer staples sector and manages $5.5 million in total assets. This ETF fared slightly better than XLP over the last half-decade by a small margin:

VDC 5-year Performance Compared to S&P 500 Index (Image Credit: CNBC)

The Consumer Discretionary Select Sector SPDR Fund (XLY) tracks the Consumer Discretionary Select Sector Index. This ETF offers broad exposure to the consumer discretionary sector and manages $20.4 million in total assets. XLY managed to outperform the S&P 500 Index by a not-insignificant margin over the pandemic, after walking in lockstep for much of the previous five years:

XLY 5-year Performance Compared to S&P 500 Index (Image Credit: CNBC)

The Consumer Discretionary Select Sector SPDR Fund (XLY) tracks the Consumer Discretionary Select Sector Index. This ETF offers broad exposure to the consumer discretionary sector and manages $20.4 million in total assets. XLY managed to outperform the S&P 500 Index by a not-insignificant margin over the pandemic, after walking in lockstep for much of the previous five years:

XLY 5-year Performance Compared to S&P 500 Index (Image Credit: CNBC)

The Vanguard Consumer Discretionary ETF (VCR) manages $5.9 million in total assets. This ETF tracks the MSCI US Investable Market Consumer Discretionary 25/50 Index and thereby offers targeted exposure to U.S. consumer discretionary sector. Although VCR closely tracked the S&P 500 Index for much of the late 2010s, it overshot the Index in the latter half of 2020:

VCR 5-year Performance Compared to S&P 500 Index (Image Credit: CNBC)

Considerations when Investing in Consumer Securities

For those investors looking to dabble in consumer securities, it’s important to note that each sector comes with its challenges and benefits.

Consumer staples

  • Generate consistent revenues
  • More impervious to recessive declines
  • May experience above-market performance in some economic downturns
  • Often offer high dividend yields and (for some) consistent payout increases
  • Typically slow growing, even in the best of economies
  • Limited price highs and may underperform the market when interest rates rise

Consumer discretionary

  • May outperform the broader market in a robust economy but experience a fair amount of spring back during periods of recession
  • More volatile than staple stocks
  • Can experience both exorbitant highs and catastrophic lows in short periods of time

The bottom line

In a growing economy, most sectors will see some level of stock value increases, aided along by increased profits and consumer income. As consumer discretionary securities often lead a stock market recovery, hopping on early and holding long-term – or until the market begins to fall – is a popular (and potentially profitable) strategy. On the other hand, because staple stocks perform counter to consumer discretionary stocks during recessions, they provide a safe haven for diversified investors to boost gains in the face of impending – or past – losses.

Visit our Learning Center for the full “Investing Explained” resource

Looking for a new podcast? Check out The Balance’s list of the best finance podcasts for 2021. There are finance podcasts for everyone: beginners, women, students, people who want to get out of debt, people who want to achieve total financial independence, the list goes on. 

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