Despite the coronavirus crisis, the S&P 500 has more than doubled off its bottom last year. Consequently, it has become especially hard for investors to pinpoint cheaply valued stocks, with attractive expected returns. In this article, we will analyze the prospects of three consumer discretionary stocks which are attractively valued right now.

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Foot Locker (FL)

Foot Locker is a well-known apparel retailer, known for its namesake Foot Locker brand. It was founded in 1974 and currently operates nearly 3,000 stores in 27 countries.

Foot Locker was adversely affected by the lockdowns and the other social distancing measures imposed due to the pandemic last year. As a result, the retailer incurred a 43% plunge in its earnings per share in 2020.

However, thanks to the massive vaccine rollout and the unprecedented fiscal stimulus packages offered by most governments in response to the pandemic, Foot Locker is recovering strongly this year. In the third quarter, the company grew its same-store sales and its total sales by 2.2% and 3.9%, respectively, over the prior year’s quarter. It also expanded its margins impressively and thus it grew its earnings per share 60%.

Foot Locker is facing some issues in its supply chain but it enjoys sustained demand for its products. As a result, it is on track to more nearly triple its earnings per share this year, from $2.81 to an all-time high of about $7.60. The market has punished the stock harshly lately, primarily due to management’s expectations for continued supply chain issues for at least another quarter. However, given the record profits of the retailer, we view the steep decline of the stock price as unwarranted.

Foot Locker cut its quarterly dividend by 62.5% last year due to the pandemic, thus confirming its sensitivity to recessions. However, the stock is currently offering a 2.9% dividend yield, which is more than double the 1.2% yield of the S&P 500. Given also its extremely low payout ratio of 16% and its rock-solid balance sheet, Foot Locker can grow its dividend significantly in the upcoming years.

Foot Locker recently announced the acquisition of two retailers of athletic apparel, WSS and Atmos. The former appeals to the fast-growing Hispanic population, it has grown its sales by 15% per year on average in the last three years and has the potential to more than double its sales in the long run. Atmos is Japan’s top-tier, multi-branded sneaker boutique, with ample room for future growth. Nevertheless, despite these two growth drivers, it is prudent to expect the earnings per share of Foot Locker to decline at a 2% average annual rate over the next five years due to the high comparison base formed by the blowout earnings this year.

On the other hand, Foot Locker is currently trading at a price-to-earnings ratio of only 5.5, which is much lower than our assumed fair price-to-earnings ratio of 11.0 of the stock. If the stock reaches its fair valuation level over the next five years, it will enjoy a 14.9% annualized valuation boost. Given also its 2.9% dividend and a 2% decline in earnings per share, the stock has the potential to offer a 15.1% average annual total return over the next five years.

Hanesbrands (HBI)

Hanesbrands is a leading marketer of everyday basic innerwear and activewear apparel. It sells its products under well-known brands, including Hanes and Champion, in America, Europe, Australia and the Asia-Pacific region.

Hanesbrands has failed to grow its sales for years, primarily due to some questionable acquisitions it has performed and the high debt load that has resulted from those acquisitions. However, the company has finally established a reliable growth plan, which has begun to bear fruit. The growth plan relies mostly on the international expansion of the Champion brand, growth of innerwear sales with products that appeal to young consumers as well as online sales growth.

In the third quarter, Hanesbrands grew its revenue 6% over the prior year’s quarter, primarily thanks to 33% growth in the global Champion brand and 12% growth in the U.S. innerwear business. The company benefited from strong consumer demand in the U.S., Europe and China, which more than offset the effect of lockdowns in Australia and Japan. Excluding the huge sales of COVID masks in the prior year’s quarter, sales would have grown 18%. Hanesbrands also grew its earnings per share 15%, from $0.46 to $0.53, and exceeded the analysts’ consensus by $0.06.

Thanks to the promising growth plan of Hanesbrands, we expect the retailer to grow its earnings per share at a 6.0% average annual rate over the next five years. The stock is also offering an above-average dividend yield of 3.7%. Given the healthy payout ratio of 33%, the dividend is safe for the foreseeable future. On the other hand, investors should note that the company has frozen its dividend for five consecutive years, mostly due to its debt load. Therefore, it is prudent not to expect meaningful dividend growth anytime soon.

Moreover, Hanesbrands is currently trading at a price-to-earnings ratio of 8.8, which is lower than our assumed fair price-to-earnings ratio of 10.0 of the stock. If the stock reaches its fair valuation level over the next five years, it will enjoy a 2.6% annualized valuation boost. Given also its 3.7% dividend and 6.0% annual earnings growth, the stock can offer an 11.4% average annual total return over the next five years.

Leggett & Platt (LEG)

Leggett & Platt is an engineered products manufacturer. Its product portfolio includes furniture, bedding components, store fixtures, die castings, and industrial products. The company was founded in 1883 and has raised its dividend for 48 consecutive years.

Leggett & Platt was hurt by the pandemic last year but it is recovering strongly this year thanks to the distribution of vaccines and the immense fiscal stimulus packages offered by the government, which has greatly enhanced the discretionary income of consumers.

In the third quarter, the company grew its revenue 9% over the prior year’s quarter thanks to material price hikes, which more than offset a 6% decrease in volumes sold. Earnings per share decreased 10% due to lower margins and a higher tax rate. Nevertheless, Leggett & Platt is still on track to post record earnings per share around $2.75 this year.

Leggett & Platt has more than doubled its earnings per share over the last decade. The company has decelerated in the last five years but we still expect it to grow its bottom line at a 5.0% average annual rate over the next five years.

Moreover, Leggett & Platt is a Dividend Aristocrat, with 48 consecutive years of dividend growth. It is also offering an attractive 4.3% dividend yield, which has a wide margin of safety given the reasonable payout ratio of 61% and the healthy balance sheet of the company.

Leggett & Platt is currently trading at a price-to-earnings ratio of 14.4, which is lower than our assumed fair price-to-earnings ratio of 16.0 of the stock. If the stock reaches its fair valuation level over the next five years, it will enjoy a 2.2% annualized valuation boost. Given also its 4.3% dividend and 5.0% annual earnings growth, the stock can offer a 10.7% average annual total return over the next five years.

Final Thoughts

The above three consumer discretionary stocks have greatly benefited from the ongoing economic recovery from the pandemic and they are cheaply valued right now. As a result, they are likely to offer double-digit annual total returns over the next five years. Nevertheless, these stocks are sensitive to any negative development related to the pandemic in the short run. Therefore, only the investors who can ignore the short-term volatility of stock prices should consider purchasing these stocks.