Growth Leaders In Consumer Discretionary

The consumer discretionary sector is home to many of the most powerful brands in the world, and many companies in the sector have produced outstanding gains for investors over the long term. On the other hand, the sector is also widely cyclical and aggressively competitive, so picking the right names is remarkably important when investing in consumer discretionary stocks.

The following article is introducing a quantitative system based on identifying companies in the consumer discretionary sector with consistent growth leadership and rising earnings expectations. The system has produced solid backtested performance, substantially outperforming the benchmark over the backtesting period.

Past performance does not guarantee future returns, but a system such as this one makes sense from a fundamental point of view, and relying on hard quantified data for investing decisions is a far sounder approach than trying to pick winning stocks based on opinions and speculation.

Consistent Growth Leaders

The following quantitative system excludes over the counter stocks and companies with a market capitalization below 250 million from the investable universe to guarantee a minimum liquidity level and size.

The system then requires a company to generate revenue growth rates above 50% of companies in the industry over three different timeframes: the most recent quarter, on a trailing twelve months basis, and in the past five years.

The main idea behind this criteria is focusing on companies with above-average growth on a consistent basis. Even a mediocre company can generate attractive growth numbers in a particular period, but it takes a remarkably strong business to outperform the industry over multiple timeframes.

The consumer discretionary sector is savagely competitive, if a company is outgrowing the competition on a consistent basis, then it needs to have solid competitive advantages, such as a strong brand, a superior business model, or a more innovative strategy.

In addition to this, the company needs to have rising earnings expectations over the past 13 weeks. In other words, the average earnings estimate for the current year needs to be higher than it was 3 months ago.

Stock prices don’t just reflect financial performance in isolation, but performance in comparison to expectations can be a more powerful return driver. If earnings expectations for the company are increasing, this generally means that the stock price is moving in the right direction too.

This selection criteria is quite demanding, from a starting universe of nearly 6,000 stocks, only 670 companies meet the screening parameters. Narrowing down the search to only companies in the consumer discretionary sector, this leaves us with 88 stocks in the investable universe.

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Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in ...

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