4 Stocks to Play the Shift in Consumer Spending

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. During the pandemic, consumer spending shifted dramatically away from services and toward goods. But are consumer spending patterns shifting back to their prepandemic trends? And what industries and companies are likely to benefit from normalized spending behavior? Here to discuss some new research on the topic is Dave Sekera. Dave is Morningstar's chief U.S. market strategist.

Dave, let's get started by defining our terms a little bit. What qualifies as a service? What qualifies as a good?

David Sekera: Sure. Now, I'm sure the economists have very technical definitions of each. But simply stated, when I'm thinking about services versus goods, goods are things that people buy to consume, and that's broken down into two different categories--durable goods and nondurable goods. Durable goods being those items that last a long time, think automobiles, and then nondurables being those things that people consume in the short term, i.e., food and beverage. The services side, those are intangibles. Those are the things that I think about that people end up utilizing as opposed to consuming. So, that could range anywhere from your healthcare, to transportation, to travel and entertainment.

4 Stocks to Play the Shift in Consumer Spending

Most of these stocks are considered undervalued. Data as of Aug. 17, 2022.

1. Delta Air Lines DAL
2. Carnival CCL
3. Hyatt H
4. Park Hotels PK

Dziubinski: Let's recap a little bit of what happened with spending during the pandemic.

Sekera: Well, as you remember, at the beginning of the pandemic, all spending just came crashing down immediately. What we found is that spending, though, when it started to rebound was very concentrated in the goods sector. And in fact, not only did goods rebound very quickly, but it actually surpassed prepandemic trends. Now, services, on the other hand, have certainly been lagging as people have been unwilling or unable to go out during the beginning parts of the pandemic. So, what we're seeing more recently is that as the pandemic is receding, economic behavior is normalizing, and we are starting to see consumers now shift away from goods that they had been spending on and back into those services categories.

Dziubinski: Now, in your research report, you noted that growth on goods spending sort of peaked in 2021 and has slightly come down since then, but we're still not back where we were to those prepandemic trends. When do you forecast that we might get back to normalcy when it comes to consumer spending?

Sekera: We expect it's probably going to be within the next 12 months. Maybe 18 months or so, but 12 to 18 is when we think we'll see that full normalization occur. And when we're looking at that, we think that there is about a $450 billion shift that will occur out of the goods category and back into that services category.

Dziubinski: Let's focus today on some opportunities in the travel industry, which is a service industry as that consumption shifts back to services. Let's start with the major airlines. Where does travel stand in terms of its prepandemic levels? And how do airlines' stocks look today?

Sekera: Well, we think all of the airlines are undervalued today, but the one that we're most interested in is Delta Airlines, and that's the one that we think is actually best leveraged to the return of the business traveler. So, when we look at air traffic today, we see that leisure traffic has actually mostly rebounded already. But as you would suspect with videoconferencing taking place, taking some of the meetings that used to occur, business travel has definitely lagged. But according to our equity team, we believe that business travel should return to prepandemic levels by 2024.

Dziubinski: And then, let's talk about cruise lines. What's the recovery looked like there? And are there opportunities for investors?

Sekera: No one got hit as hard and fast as the cruise lines got hit at the beginning of the pandemic, and it's been a bumpy ride for them over the past year and a half. But what our analyst team is seeing now is that there has been a very good rebound in the number of bookings in the second half of this year and going into next year as well. But not only that, they are also seeing good increases in pricing at the same point in time. So, between those, we do think that the cruise lines are all undervalued at this point in time. The one that I would highlight as being the most undervalued right now is Carnival Cruise Lines.

Dziubinski: And then, lastly, wrap up talking about hotels. Are occupancy levels back to where they were prepandemic and, again, what might be an idea or two there?

Sekera: Sure. So, in the hotel space, they had actually been rebounding relatively well, and that kind of goes to what we were talking about earlier with that leisure traffic coming back although the business had been lagging behind. But with the selloff in the markets earlier this year, with the weakness that we've seen in the economy, those hotel stocks got caught up in the rest of that downdraft. So, we do think there are a number of opportunities in that space. Companies like Hilton and Hyatt, which look attractive at today's levels. And for those investors that are interested in the REIT space, I would highlight Park Hotels. So, Park is one that is levered to the high-end consumer. And so not only do we expect that business travel will help that out, but we're also looking for the return of that international travel. Oftentimes, that's going to be in that very ultra-high-end space that Park serves.

Dziubinski: Well, Dave, thanks for your time today and for the investment ideas. We appreciate it.

Sekera: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch "3 Top Stocks to Buy in Q3 2022" to get more recommendations from Dave Sekera.