In this article, we discuss the 10 best consumer discretionary stocks to buy according to hedge funds along with the latest updates and data around consumer spending.

Many experts and analysts are concerned about a slowdown in consumer spending. However, reports show that consumer behavior is changing rather than slowing down. According to a report by Colliers Retail Market Intelligence, retail foot traffic rose by 4.4% in June, indicating strong consumer activity despite flat overall sales.

While furniture and home improvement stores saw declines due to reduced monumental purchases and a sluggish housing market, grocery stores, and apparel retailers performed better. Grocery sales grew by 1.7%, with a nearly 5% increase in foot traffic, as consumers managed their budgets despite cutting costs. Apparel sales also increased by 3.8%, driven by early back-to-school shopping and wardrobe updates, leading to an 8.3% rise in foot traffic.

In July, consumer spending saw a modest increase compared to June, with gains across 10 of 12 retail categories, as reported by the CNBC/National Retail Federation (NRF) Retail Monitor. Retail sales, excluding autos and gas, rose by 0.7% month-over-month, slightly up from June’s 0.5%, but the year-over-year growth slowed to 0.9%, down from 3.4% in June.

Core retail, which excludes restaurants, saw a 1% monthly increase. Significant sector performances included a 3.4% rise in gas station sales and a 2.1% increase in restaurant spending month-over-month. Conversely, the healthcare, personal care, and garden supplies sectors experienced slight declines.

June and July data together indicate that consumer spending remains resilient, supported by strong household finances and a strong job market. While some sectors, particularly furniture and home improvement, are struggling due to reduced consumer confidence and a slow housing market, other categories are performing well.

The data suggests that consumers are still willing to spend, especially on essential and seasonal items, though they may be more cautious with larger purchases. Despite some areas of decline, the overall retail environment appears stable, with consumers continuing to spend where they find value, which indicates a cautiously optimistic outlook for the remainder of 2024.

Latest Updates on Interest Rates and Potential Effects On Consumer Spending

In the July meeting, Fed Chair Jerome Powell highlighted the Fed’s ongoing focus on achieving maximum employment and stable prices. He noted significant progress in the economy, with inflation dropping from 7% to 2.5% and a balanced labor market with low unemployment at 4.1%. The Fed chose to keep interest rates steady within the 5.25% to 5.5% range and continue to reduce its securities holdings to maintain a restrictive stance, which is aimed at aligning demand with supply and reducing inflationary pressures.

Powell mentioned that while inflation has eased, the Fed is not yet ready to lower rates and requires more consistent positive data before making such a move, possibly as early as September. According to the CME Fed Watch Tool, all the experts are expecting cuts in September. 50.5% of the experts predict a 25 basis points (bps) reduction in the interest rates while 49.5% expect a 50 bps cut.

Rate cuts generally have a positive effect on consumer spending. When interest rates are lowered, borrowing becomes cheaper, which could lead to increased consumer borrowing and spending. This increased affordability can boost consumer confidence and promote spending on discretionary items. That’s a good set up for discretionary stocks, and with that, let’s look at the 10 best consumer discretionary stocks to buy according to hedge funds.

Our Methodology

For this article, we used the Finviz stock screener to identify over 50 large-cap consumer discretionary stocks then narrowed our list to 10 stocks that were most widely held by institutional investors as of Q1, and listed the stocks in ascending order of hedge fund sentiment.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

10 Best Consumer Discretionary Stocks To Buy According to Hedge Funds

10. The Home Depot, Inc. (NYSE:HD)

Number of Hedge Fund Holders: 70

The Home Depot, Inc. (NYSE:HD) is a leading American multinational corporation specializing in home improvement retail. As the largest home improvement retailer in the U.S., it offers a broad range of products, including tools, construction materials, appliances, and garden supplies.

Home Depot (NYSE:HD) provides both in-store and online shopping options. The company’s online presence includes websites such as homedepot.com, homedepot.ca, and homedepot.com.mx, as well as specialized sites like blinds.com, justblinds.com, and americanblinds.com for custom window coverings.

Additionally, Home Depot (NYSE:HD) operates thecompanystore.com for textiles and décor, and hdsupply.com for maintenance, repair, and operations (MRO) products and services.

At a stake value of $5.5 billion, 70 hedge funds held positions in Home Depot (NYSE:HD) in the first quarter. As of Q1, Fisher Asset Management is the most dominant shareholder in the company and has a position worth $3.445 billion. The company takes the 10th spot on our list of best consumer discretionary stocks to buy according to hedge funds.

Since going public in 1981 with just six stores, Home Depot (NYSE:HD) has grown into a major player in the home improvement sector. Today, it operates over 2,300 stores across the United States, Canada, and Mexico. The company’s stock price has delivered an astounding return of 112,364% as of August 9, since its initial public offering, which highlights its remarkable growth and success.

Home Depot (NYSE:HD) is the largest do-it-yourself and home improvement retailer in the U.S. and benefits from its extensive network and well-established business model. One of the key advantages of the company is its stable focus on home improvement projects, rather than shifting consumer trends in fashion or electronics. This allows the company to maintain steady performance and consistently increase dividends while repurchasing stock. The company’s strong position in the market makes it a reliable choice for investors.

Home Depot (NYSE:HD) is well-positioned for future growth, especially as the housing market shows signs of recovery. With the Federal Reserve expected to lower interest rates starting in September, borrowing costs will decrease, which could revitalize home buying and renovation activities. Lower mortgage rates and easier access to home equity lines of credit will likely give way to both home purchases and renovation projects, benefiting the company.

Additionally, Home Depot (NYSE:HD) is expanding its market share among professional contractors, a crucial segment for its growth. This expansion has been further supported by the acquisition of SRS Distribution done in March, a leading distributor in roofing, landscaping, and pools. This acquisition opens up access to a $1 trillion market, possibly improving the company’s footprint and growth potential.

9. NIKE, Inc. (NYSE:NKE)

Number of Hedge Fund Holders: 71

NIKE, Inc. (NYSE:NKE) is an American multinational corporation that designs, develops, manufactures, and markets athletic footwear, apparel, equipment, and accessories. It is one of the best consumer discretionary stocks to buy according to hedge funds. The stock was held by 71 hedge funds in the first quarter and the stakes amounted to $3.6 billion. Fisher Asset Management is the top shareholder of the company and has a position worth $953.926 million, as of March 31.

The company offers a range of performance gear and accessories, including bags, sports balls, socks, eyewear, watches, digital devices, bats, gloves, protective gear, and other sports equipment. It markets these products under several brands such as Nike Pro, Air Jordan, and Converse. The company is also well-known for its famous “Just Do It” slogan and the distinctive Swoosh logo.

NIKE (NYSE:NKE) has built one of the most recognized brands in the world through effective marketing, high-profile athlete endorsements, and innovative product development. The company’s success is not merely a result of chance but a culmination of decades of strategic effort to connect deeply with consumers.

It has cultivated a distinct style that goes beyond performance. Its products have become a significant part of global fashion, mainly due to its association with iconic athletes. One of the most notable examples is the Air Jordan line.

Launched in 1985, Air Jordan generated $126 million in its first year and has since grown to achieve $7.1 billion in revenue. This remarkable growth is evidence of the company’s effective brand management and market positioning. It continues to attract endorsements from top athletes such as Tiger Woods, Cristiano Ronaldo, and LeBron James, which strengthens its presence in the sports world.

Moreover, NIKE’s (NYSE:NKE) influence extends to the highest levels of global sports, as it sponsors major leagues like the NFL, MLB, and NBA. This widespread sponsorship network, which includes everything from professional teams to corporate apparel, further solidifies the company’s role in the sports industry.

In summary, NIKE’s (NYSE:NKE) combination of a powerful brand, a strong presence in global sports, and a constant focus on innovation makes it a standout player in the industry, with the potential for continued success and growth.

Mar Vista Focus strategy stated the following regarding NIKE, Inc. (NYSE:NKE) in its first quarter 2024 investor letter:

“NIKE, Inc.’s (NYSE:NKE) recent earnings report was a mixed bag. While revenue met expectations and earnings exceeded them, the stock price dipped due to management’s cautious outlook for fiscal 2025. The company is currently undergoing a period of internal restructuring and product line adjustments, which is expected to lead to flat revenue growth in the first half of the coming fiscal year. However, this transition aims to position Nike for long-term success.

Our conviction in Nike remains high, and we expect it to emerge stronger and more competitive once the restructuring is complete despite the softer revenue forecast. Nike still anticipates earnings will grow around 10% in calendar 2024 and will accelerate to 15% in 2025 as execution normalizes.”

8. Tesla, Inc. (NASDAQ:TSLA)

Number of Hedge Fund Holders: 74

Tesla, Inc. (NASDAQ:TSLA) is the leading company among the global electric vehicle (EV) companies. The company also provides other clean energy solutions such as stationary battery energy storage devices, solar panels, and solar shingles.

As of 2023, it manufactured 1.8 million battery electric vehicles BEV and is only the sixth company to cross the $1 trillion market cap mark. In 2023, the company’s Model Y broke Toyota’s (NYSE:TM) dominance in the automotive market to become the most selling vehicle in the world.

Even though Tesla (NASDAQ:TSLA) faces stiff competition from Chinese EV companies, especially BYD, the company has made a significant name for itself in the EV market and is expected to remain one of the top sellers for the foreseeable future, especially in the North American market.

As of 2023, the company has a nearly 20% market share in the global EV industry. The global EV industry is expected to be over $670 billion by the end of 2024 and is expected to reach $1.9 trillion by 2032, according to Fortune Business Insights.

On August 8, RBC Capital analyst Tom Narayan slightly reduced Tesla’s (NASDAQ:TSLA) price target from $227 to $224 but maintained an Outperform rating and showed confidence in the company’s potential despite the minor adjustment. Narayan highlighted several key factors that make the company an attractive investment. It is positioned to benefit from increasing regulatory credits, which are earned by producing electric vehicles that meet emissions standards, providing a lucrative revenue stream without additional production costs.

Tesla’s (NASDAQ:TSLA) growing energy storage business is also a significant driver of future growth as demand for renewable energy solutions rises. Additionally, Narayan noted that Tesla (NASDAQ:TSLA) could potentially cut the price of its Full Self-Driving (FSD) software, a move that would likely increase its adoption and provide a substantial revenue boost. These factors collectively position Tesla as a compelling investment despite the slight downward revision in its price target.

In February, Stellantis (NYSE:STLA), the automaker behind Jeep, Ram, and Chrysler, announced plans to adopt Tesla’s (NASDAQ:TSLA) North American Charging Standard (NACS) for its electric vehicles by 2025, joining major automakers like Ford (NYSE:F), General Motors (NYSE:GM), and others in standardizing the charging connector across North America.

This comes as great news for Tesla (NASDAQ:TSLA) as the company benefits significantly from the widespread adoption of its NACS by other automakers. First, it reinforces the company’s position as a leader in the EV charging infrastructure, which is evidence of industry-wide recognition of the superiority and reliability of its supercharger network. This adoption could lead to increased usage of the company’s charging stations by non-Tesla vehicles, which could potentially create a new and stable revenue stream.

In Q1, 74 hedge funds had stakes worth $4.95 billion in Tesla (NASDAQ:TSLA), making it one of the best consumer discretionary stocks to buy. As of March 31, Cathie Wood’s ARK Investment Management is the company’s most prominent investor with nearly 5.2 million shares worth $910.316 million.

Baron Partners Fund stated the following regarding Tesla, Inc. (NASDAQ:TSLA) in its first quarter 2024 investor letter:

“The vast majority of the Fund’s underperformance this quarter stemmed from the Fund’s 10-year investment in Tesla, Inc. (NASDAQ:TSLA). Tesla’s shares fell 29.3% during the period and detracted 13.41% from the Fund’s first-quarter results. Although Tesla has contributed importantly to the Fund’s performance since 2014, on occasion it has detracted from quarterly performance. In previous instances when Tesla shares have underperformed during a discrete period, they have shortly afterwards reflected the strong growth of the underlying business and the stock has appreciated considerably. We believe that will be the case again, although cannot guarantee it.

A significant decline also occurred at the end of 2022. In that instance, investors had become concerned about a host of external factors. Investors believed the company founder, visionary, and CEO Elon Musk was distracted by his acquisition of Twitter. They also believed a weak Chinese economy emerging from COVID and U.S. government policies would curtail the purchases of Tesla vehicles. These fears proved to be overblown. As the company achieved milestones in the succeeding year, the stock subsequently doubled over the next 12 months…” (Click here to read the full text)