With Australian consumers struggling with the cost of living, it is no surprise that one particular ASX sector has flopped over the past 18 months.
Consumer discretionary businesses are the first to notice a drop in earnings as customers cut back on spending that they see as not essential.
In fact, the S&P/ASX 200 Consumer Discretionary Index (ASX: XDJ) has lost about 15% since the start of last year.
For DNR Capital portfolio manager Sam Twidale, this is a golden opportunity to buy up ASX shares that the rest of the market is ignoring.
“Fear and uncertainty around high quality businesses is causing dislocations between price and value,” he said.
“And for us, this shows up as a concern around the economy, especially impacting the consumer discretionary sector. That’s now our largest overweight.”
According to Twidale, those who are prepared to stick to quality consumer discretionary stocks will eventually benefit.
“It’s a more contrarian positioning but I think investors will be rewarded taking a longer term view for many stocks in this sector.”
2 stocks to buy that are both small cap and consumer discretionary
So which ASX shares would Twidale go for right now?
Firstly, he favours small caps as they have much more potential to grow after underperforming over the past couple of years versus their large cap sisters.
“But we still need to be selective. Investors need to look closely at what’s under the surface of the market as there are still some areas of overvaluation and speculative activity.
“Defensive companies still have high valuations as investors pour into that sector to manage recessionary risks and concerns around slowing economic growth.”
The two consumer discretionary ASX shares that the DNR Capital team have been buying recently are Breville Group Ltd (ASX: BRG) and Lovisa Holdings Ltd (ASX: LOV).
Twidale called them “two high quality companies” that are “leaders in their industries and generate high returns”.
“These companies are well managed with strong balance sheets to get through a bit of a trickier period in the short term. They’re not out of the woods yet,” he said.
“However, we think they will emerge on the other side of this cycle in a really strong position. This presents the opportunity for long-term investors.”
On the other side of the ledger, Twidale’s team has been reducing its exposure to the mining sector after having it dominate the portfolio for “several years”.
“Conditions have changed and we are not seeing the contrarian opportunities and the mispricings that we saw several years ago,” he said.
“For investors willing to look through short term uncertainty, the small cap sector is now presenting great opportunities to take advantage of.”
