Image Source: Pexels

The SPDR Retail ETF (XRT) is down 3.8% year-to-date, and consumer discretionary as a whole has been the worst-performing of the 11 major S&P sectors. But most of the hard data still points to a healthy US economy. I like Carnival Corp. (CCL), writes Chris Preston, chief analyst at Cabot Value Investor.

The weakness makes sense. Tariffs threaten to hit US retailers hardest, including the many companies that sell products like toys, child car seats, and sports apparel, such as Dick’s Sporting Goods Inc. (DKS). Combine that with escalating fears of a US recession – also brought on by tariffs – and it could be a double whammy for retailers who don’t sell the essential everyday items that consumers buy regardless of the economic environment.

Yet as of now, tariffs are on hold. In early April, a week after “Liberation Day,” President Trump instituted a 90-day pause on high tariffs with basically every country but China. Earlier this month, the administration inked a tariff deal with the UK.

Deals to avoid tariffs could be worked out with each of the roughly 130 nations they were levied against before they ever do any real damage. If that happens, then it could be a “no harm, no foul” situation, and the US economy will continue on its merry way, with consumers never really reining in their spending.

Carnival Corp. (CCL) Chart

While US retailers are doing just fine, their share prices are not. And therein lies an opportunity. Consumer discretionary stocks as a group trade at 20.5x forward earnings estimates, less than the 22.1 forward P/E ratio in the S&P. That’s roughly middle of the pack among S&P sectors in terms of valuation – but for a sector that’s posted the worst year-to-date performance.

Which consumer stocks stand out as being particularly undervalued? Well, we just added one of them: Cruise line giant Carnival Corp. It’s off to a rousing start for us – and should continue to work.

My recommended action would be to consider purchasing shares of Carnival Corp.

About the Author

Chris Preston is an investment analyst and web content editor for the Cabot Wealth Network website. He is also a news writer for Cabot's free Wall Street's Best Daily e-newsletter, and contributes to other Cabot advisories and special projects. He was previously an analyst and assistant managing editor with Wyatt Investment Research. Mr. Preston has been a professional writer for over 10 years, picking up two writing awards along the way.

More By This Author: