Stocks to buy

3 Consumer Stocks With Untapped Value

The world of consumer discretionary stocks can be tricky. It is full of highly cyclical businesses that can take a sudden turn in either direction. Often when you least expect it. This is why it is of utmost importance to pick companies that expose you to both the cyclical nature of a discretionary name, and the stability of a consumer staples business.

Following this criterion for your next potential investment, you could easily land on the following list of consumer stocks. Once you look inside their financials, you’ll find an undeniable upside scenario. By holding these for long enough, you are almost guaranteed to realize how high your net worth could go.

Starbucks (SBUX)

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Starbucks (NASDAQ:SBUX), the most popular coffee brand in the U.S., tends to offer people a certain feeling of belonging, and the taste is undeniably distinguishable.

Because of this brand moat and penetration, you can expect signs of high pricing power from the business financials. A gross margin rate of over 27% is a surefire way to tell how this business is strongly positioned to keep growing and aggressively reinvesting in its proven business model.

Keeping this in mind, it shouldn’t be surprising to learn that this stock has outperformed the broader S&P 500 index by nearly 2,000% since its IPO in 1992. That is an annualized return of roughly 66.0%, but what exactly drives these compounding increases?

The return on invested capital (ROIC) rate is the one that tends to drive stock price performances over the long term. Starbucks, in its highly well-managed manner, can generate a steady rate of 22% on a five-year average.

Following the high margins and high returns, SBUX is one of the consumer stocks with tons of untapped value in the long-term.

Ulta Beauty (ULTA)

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Ulta Beauty (NASDAQ:ULTA) carries the high margin and high return profile you should always look for in a value play.

Before we go into the weeds of the financials and other developments, it would be helpful to understand why this business can remain so strong in the first place. No matter the current economic environment, consumers will still need to restock their beauty inventory.

Because of this underlying stability and brand preference, Ulta can carry a gross margin of over 40%. Not only that, the business is so well managed that it can consistently generate ROIC rates of over 25% on a five-year average.

No wonder this business keeps beating the S&P 500 by as much as 1,200% since its IPO in 2007. But wait, there’s more! According to their annual report, the company has a 90% retention rate on their membership programs. This is unheard of anywhere in the retail world, and adds to why there is tons of untapped value for ULTA.

Target (TGT)

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Target (NYSE:TGT) is a favorite shopping location for a broad base of customers. And, it is becoming a big target for value investors hunting for untapped value.

You can see this at play in the company’s gross margins, which are also consistently above the 25% mark. This adds to the strength of this business above competitors in the retail space. Heading over to their rates of return, Target has hit a bit of a bump lately.

The current ROIC of only 10.5% is a shadow of the over 20% they generated pre-pandemic. The reason for this slowdown? Well, they are investing heavily into their redesign to accommodate for integrated Ulta and Starbucks locations. Target’s hope is that these partnerships will contribute to having more traffic driven to their stores.

As of this writing, Gabriel Osorio-Mazzilli did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Gabriel Osorio is a former Goldman Sachs and Citigroup employee. He possesses discipline in bottom-up value investing and volatility-based long/short equities trading.

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