We recently compiled a list of the 10 Best Consumer Discretionary Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where Alibaba Group Holding Limited (NYSE:BABA) stands against the other consumer discretionary stocks.
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).
An e-commerce platform displaying a wide range of products to customers online.
Alibaba Group Holding Limited (NYSE:BABA)
Number of Hedge Fund Holders: 103
Alibaba Group Holding Limited (NYSE:BABA) is a prominent Chinese multinational technology enterprise renowned for its diverse range of activities across e-commerce, retail, internet services, and technology. Its business activities span various sectors, including core commerce, digital media and entertainment, and cloud computing.
Alibaba’s (NYSE:BABA) portfolio includes several famous platforms and services. It runs Taobao and Tmall, major digital retail platforms, and Alimama, its in-house monetization service. The company also operates online wholesale sites such as 1688.com and Alibaba.com, along with AliExpress, an international retail marketplace.
Additionally, Alibaba (NYSE:BABA) owns several e-commerce platforms like Lazada, Trendyol, and Daraz, and a grocery retail platform called Freshippo. Tmall Global serves as its import-focused e-commerce outlet.
Instead of directly selling products, Alibaba (NYSE:BABA) earns revenue by charging fees and commissions to merchants who use its platforms, including AliExpress. The company holds a dominant position in China’s retail market, commanding a 40% share of the total e-commerce GMV and a substantial active user base of 930 million. The company also generates significant revenue from its cloud computing services, logistics, and digital entertainment ventures.
Alibaba (NYSE:BABA) was part of 103 hedge funds’ portfolios in the first quarter with a total stake value of $3.3 billion. Appaloosa Management LP is the biggest shareholder in the company and has a position worth $814.050 million as of Q1. The company takes the second position on our list of best consumer discretionary stocks.
Alibaba (NYSE:BABA) is on a promising trajectory in its international commerce segment, which, while currently a smaller part of its overall business, shows significant potential for expansion. During the first three months of 2024, the company generated $3.8 billion from international commerce, accounting for 12% of its total revenue of $30.7 billion.
This segment is not only growing rapidly but is also Alibaba’s(NYSE:BABA) fastest-expanding area, with a remarkable 45% year-over-year increase. Over the past three years, the international commerce sector has seen an average growth rate of 32% annually, driven primarily by platforms like AliExpress, Trendyol, and Lazada.
Revenue from International Commerce Retail, excluding Alibaba’s B-to-B platform, surged by 60% in 2024 alone, owing to a substantial increase in orders through AliExpress’ Choice platform, which now represents approximately 70% of AliExpress’ total orders.
The potential for Alibaba’s (NYSE:BABA) international commerce to grow further is substantial, especially as the company incorporates artificial intelligence to boost its global operations. AI is proving to be a game-changer, helping merchants overcome language barriers, resolve customer disputes, and create product descriptions more efficiently.
Zhang Kaifu, who leads Alibaba’s (NYSE:BABA) AI development for international e-commerce, reported that in internal trials, AI tools have enabled merchants to increase their order volumes by up to 30%. The company’s unique advantage lies in its proprietary large language model, Tongyi Qianwen, which allows it to offer highly tailored support and further enhance growth prospects. With these advancements, Alibaba is well-positioned to expand its international commerce footprint significantly in the coming years.
O’keefe Stevens Advisory stated the following regarding Alibaba Group Holding Limited (NYSE:BABA) in its Q2 2024 investor letter:
“We initiated two new positions during the quarter: Alibaba Group Holding Limited (NYSE:BABA) and Perrigo (PRGO). Both have seen their stocks decline over 70%+ from their all-time highs.
Alibaba is the largest e-commerce player in China, with 40% gross merchandise volume (GMV) market share through its Taobao and T-mall businesses. While the cloud computing business is relatively small, its 37% market share in China positions it well to capitalize on the increasing demand for AI-related products. In the most recent quarter, AI-related cloud revenue recorded triple-digit growth y/y, with the expectation that total cloud revenue will accelerate to double-digit growth in 2H 2025.
It’s rare to find a dominant market share business with significant tailwinds trading for ~10x adj. EPS. After accounting for their ~$60B net cash balance sheet, the stock is trading at 6-7x, which, we believe, is far too cheap. We understand this business would not trade at this price if it were a U.S. business. However, the valuation gap at a high single-digit P/E is pricing in a combination of the following risks – 1. China invading Taiwan. 2. Cash can never leave mainland China (disproven). 3. Increasing competition from Pinduoduo and Shien resulting in market share loss 4. China’s geopolitical tensions worsen. 5. Economic slowdown stemming from the recent housing market downturn. 6. VIE structure creates doubt over the actual ownership of the business. All risks have merit, with cash distribution restrictions at the lower end due to the recently announced dividend and special dividend. Cash returned to shareholders totaled $16.5B in FY24, up from $13.4B in FY23…” (Click here to read the full text)
Overall BABA ranks 2nd on our list of the best consumer discretionary stocks to buy according to hedge funds. You can visit 10 Best Consumer Discretionary Stocks To Buy According to Hedge Funds to see the other consumer discretionary stocks that are on hedge funds’ radar. While we acknowledge the potential of BABA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BABA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
