Stock Choices Nike, Walmart and Morgan Stanley's Biggest Public

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Consumer discretionary stocks are a market star this year, but not all have followed the same path.

Even though discretionary stocks within the
S & P 500
since the beginning of the year, exceeding the 17.5% gain in the overall index,
Chipotle Mexican Grill

(ticker: CMG) rebounded 64.3%, while
Macy's

(M) is down 22%.

So what is the difference between winners and losers? according to Morgan Stanley analyst John Glasscompanies that can sustain profitable growth tend to stand out.

These companies may be rarer than you think.

Glass analyzed more than 90 consumer discretionary stocks and found that only one-third of its revenues had grown at least 5% annually over the last five years, while maintaining profit margins. This may seem like a pretty high bar, but the gain is important.

Companies meeting these criteria outperformed the S & P 500 by 57 percentage points over the last five years. Those that failed were 38 points behind the market.

Many latecomers have increased their profits by cutting costs without revenue growth. Margins improved, but the performance of these stocks was mixed and volatile. It seems that the market "did not give them credit for the sustainability of these benefits," Glass wrote in a Friday note.

What types of businesses are therefore most likely to maintain revenue growth without sacrificing profit margins? There are a few key factors to consider.

Industries with stronger pricing power are better positioned to withstand inflation and maintain their bottom line in difficult times, Glass wrote. He pointed out that food and housing outside the home – restaurants and hotels, in simplified English – controlled their prices the most, while margins for furniture and clothing companies were subject to the pressures of e-commerce.

Labor costs have also been adversely affected by the drop in the unemployment rate and by the proliferation of states and cities that have adopted legislation to raise the minimum wage. But not all retailers feel the same pain.

For starters, some industries are more dependent on the workforce than others. For example, labor costs in the accommodation sector typically account for about 40% of total revenue, compared with 10% in dollar stores.

Wage growth in low-wage industries, such as catering, is also faster than in higher-paying firms, such as casinos. This means that restaurant margins are under increased pressure, even though the workforce accounts for a similar share of revenues in both industries.

Freight costs are a third front in margin wars. Companies that spend more money on shipping, such as furniture, may be more affected than companies in the apparel sector.

Glass has recommended that half a dozen actions are likely to generate profitable growth over the next three years:
Burlington Stores

(BURL)
Domino's Pizza

(PHN),
Five below

(FIVE),
Las Vegas Sands

(LVS),
Nike

(NIKE), and
Walmart

(WMT).

Write to Evie Liu at [email protected]