Fortune reported in early May that the lower-income consumer was struggling to stay afloat. As a result, some companies will suffer from this situation, while others will benefit, providing investors with new ideas for stocks to buy and sell.
“‘The lower income consumer in the U.S. is stretched,’ PepsiCo CEO Ramon Laguarta said late last month when reporting better profit than expected, and ‘is strategizing a lot to make their budgets get to the end of the month. And that’s a consumer that is choosing what to buy, where to buy, and making a lot of choices.’”
As McDonald’s (NYSE:MCD) CEO Chris Kempczinski recently said, consumers of all income demographics are more selective about spending their hard-earned money.
That presents opportunities for investors. It also warns those holding shares in companies that are losing market share because of consumer caution. With consumers struggling, here are two stocks to buy and one to sell that are winning and losing.
Walmart (WMT)
Walmart (NYSE:WMT) reported exceptional Q1 2024 results on May 16, sending its shares higher, hitting an all-time high of $64.88.
On the top line, its revenues were $161.51 billion, more than $2 billion higher than analyst expectations, with earnings per share of 60 cents, eight cents higher than the consensus. Even better, it now sees 2024 sales increasing at the high end of its previous 3-4% guidance, or perhaps even above that. On the bottom line, it initially projected full-year adjusted EPS of $2.30 at the midpoint of its guidance, but it now feels it will be above that.
“We’ve got customers that are coming to us more frequently than they have before and newer customers that we haven’t traditionally had, and they’re coming into a Walmart whether it’s a virtual store online, or whether it’s one of our physical stores,” CNBC reported comments from Walmart CFO John David Rainey.
While there is no empirical evidence, I often go to Walmart to buy cat litter, and the number of high-end vehicles in the parking lot seems higher than in previous years.
There is no question Walmart thrives in this kind of economic environment.
Dollarama (DLMAF)
The second of two stocks to buy is Dollarama (OTCMKTS:DLMAF), the largest operator of dollar stores in Canada with 1,551 stores.
Why Dollarama and not Dollar General (NYSE:DG) or Dollar Tree (NASDAQ:DLTR)?
First, it faces less competition in the $5 and under marketplace. For example, in the U.S., Five Below (NASDAQ:FIVE) sells products to tweens, teens, and adults priced between $1 and $5, with some above that in its Five Beyond offering. We (I live in Halifax, Nova Scotia) don’t have that nationally in Canada. The second reason is Dollarama’s investment in the South American value market.
It first entered into a commercial partnership with Dollarcity in February 2013 to provide its expertise and sourcing services to the company. Dollarama had an option to buy 50.1% starting in the seventh year of the partnership. As of June 30, 2020, Dollarama would pay five times its 12-month EBITDA (earnings before interest, taxes, depreciation, and amortization).
Dollarama closed the deal on Aug. 15, 2019, paying $40 million down and the remaining $52.7 million in Q3 2021 (Nov. 1, 2020). As of Sept. 30, 2020, Dollarcity had 240 stores, 127 in Colombia, 64 in Guatemala, and 49 in El Salvador. As of Dec. 31, 2023, it had 532 stores, more than double in 2020 when the deal closed.
Peloton Interactive (PTON)
Peloton Interactive (NASDAQ:PTON) hit an all-time low of $2.70 on May 2. Its shares are up 45% in the three weeks since as a result of speculation, private equity firms are sniffing around to pick up the business on the cheap.
It isn’t a surprise that Peloton has imploded.
In my experience, selling expensive sporting goods equipment such as treadmills and ellipticals is a losing proposition in the long haul because only so many people will spend $1,400 or more for equipment that will sit in your basement or spare bedroom.
Back in May 2020, I wrote a piece about Peloton suggesting its business was somewhere between Nike (NYSE:NKE) and Nautilus, the former owner of Bowflex, which was acquired for just $37.5 million in April.
However, in hindsight, I was too kind about Peloton’s business, which traded around $42 at the time of my article.
“While Peloton is definitely not the next Nike, I do think it’s got a much better business model than Wayfair (NYSE:W), which may never make money,” I wrote in 2020.
“As the professor said, Peloton should make money someday. But I don’t see it becoming the next Tesla (NASDAQ:TSLA). That said, I also don’t see it becoming the next Nautilus.”
If it were solely a software business, Peloton might have a shot at survival. Unfortunately, its hardware business will kill it.
It’s a stock to sell.
On the date of publication, Will Ashworth did not have (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.