Why Value Investors Are Buying Consumer Discretionary Stocks on Sale

The market's message last week was clear. As the S&P 500 and the Dow Jones Industrial Average both hit new all-time highs, the leadership was unmistakable. The real story wasn't just the record highs, but which stocks were driving them. Consumer discretionary stocks stepped up and outshone everything else, a sector that includes two of the Magnificent Seven. This isn't a random rally; it's a cyclical signal. When the market bets heavily on cars, electronics, vacatons, and online packages, it's a bet on the American consumer. And that consumer, who drives approximately 70% of GDP, is feeling confident.

This optimism is the market's forward view. Cyclical sectors like consumer discretionary lead into economic expansions, not recessions. Their strength suggests bulls are putting real money behind a bet that fourth-quarter growth will be robust. The heavyweights in the sector, like Amazon and Tesla, are flashing bullish signals, reinforcing the trend. For now, the setup is one of acceleration, not retreat.

Yet for the disciplined value investor, this cyclical strength must be viewed through a different lens. The broader market's valuation is extreme. The total market cap of the S&P 500 now stands at 2.0x US GDP, a level far above the historical norm of 0.75x to 1x. This disconnect between the market's cyclical optimism and its overall valuation creates a tension. The rally in consumer stocks reflects a healthy economic signal, but it does not erase the fact that the entire equity market is priced for perfection.

The opportunity, therefore, is not in chasing the sector's momentum blindly. It lies in separating the signal from the noise. While the market as a whole trades at a premium, within the consumer discretionary sector-especially among its cyclical leaders-there may be high-quality, wide-moat companies trading at significant discounts to their intrinsic value. The recent leadership shows where the market's confidence is, but a value approach demands looking past the headline to find the durable businesses that can compound through the cycle, regardless of the market's current mood.

Identifying the "On-Sale" Stocks: Wide Moats and Intrinsic Value

For the value investor, the hunt is for high-quality businesses trading at a discount to their true worth. This means looking beyond the sector's cyclical momentum to find companies with durable competitive advantages-what Morningstar calls a "wide moat." These are firms with strong brands, switching costs, or economies of scale that protect their profits and allow them to earn high returns on capital over decades. The market's current optimism can obscure these gems, but it also creates opportunities when sentiment turns.

The Morningstar Wide Moat Focus Index is designed to spotlight these very stocks. It tracks companies with wide economic moats that are also trading at the lowest prices relative to Morningstar's own fair value estimates. As of September 2025, two prominent names on this list stood out for their significant discounts. Constellation Brands was trading 41% below its fair value estimate, while TransUnion was trading 29% below its fair value estimate. These weren't just minor dips; they represented substantial gaps between market price and the intrinsic value derived from their long-term cash-generating ability.

So, what is intrinsic value? It is the company's true worth, determined by its capacity to generate free cash flow and earn high returns on invested capital over the long term. A wide-moat company with a strong brand, like Constellation in beer and spirits, or one with critical data assets, like TransUnion in credit reporting, possesses the durable earnings power that intrinsic value models seek. The discount suggests the market is pricing in short-term concerns or overlooking the quality of the business's long-term cash flows.

The bottom line is that value investing is about separating the business from the stock price. It's about finding the wide-moat companies whose intrinsic value is being ignored. The recent strength in consumer discretionary stocks shows where the market's confidence lies, but the Morningstar index demonstrates that even within that sector, there are high-quality, durable businesses trading on sale. For the patient investor, that is the setup for a potential compounding opportunity.

The Case for Consumer Discretionary Quality

The recent strength in consumer discretionary stocks is a cyclical signal, but for the value investor, the real opportunity lies in the quality beneath the headline. Not all companies in the sector are created equal. The durable winners are those built on wide moats-brands with cultural relevance and operational discipline that can compound through economic cycles. Two standout examples are Crocs and Airbnb, whose current valuations reflect their intrinsic strength, not just short-term spending trends.

Crocs has transformed from a niche functional brand into a global lifestyle icon through disciplined execution. Its growth is powered by robust momentum in core clogs and sandals categories, driven by product innovation and a balanced direct-to-consumer and wholesale strategy. This focus has allowed the company to maintain pricing discipline and protect margins even in a cautious consumer environment. The strength is in its brand power and operational efficiency, not fleeting fashion. The market's recent rally in the sector has lifted Crocs shares, but its underlying model-focused on sustainable, profitable growth-suggests its current price may still offer a margin of safety for patient investors.

Airbnb presents a similar case of quality compounding. The company's fundamental strength is undeniable, with a historically low price-to-sales ratio of less than 1.7 times sales and a return on invested capital that soared to 32.6%. This combination of a low valuation and exceptional capital efficiency is a classic value signal. Its business is built on a powerful network effect and brand trust, allowing it to scale efficiently and generate high returns. The low P/S ratio indicates the market is not pricing in the full value of its durable competitive advantage, which is its platform and global brand.

The bottom line is that value investing in consumer discretionary means looking past the cyclical noise. Crocs and Airbnb are not just riding a wave of consumer confidence; they are building businesses with wide moats. Their strength is rooted in brand power and operational excellence, which allow them to earn high returns on capital over the long term. For the disciplined investor, that is the definition of durable value. When a high-quality business trades at a discount to its intrinsic worth, the market's cyclical optimism becomes irrelevant. The opportunity is in the business, not the headline.

Catalysts and Risks: The Patient Investor's Watchlist

For the value investor, the setup is one of patience. The recent strength in consumer discretionary stocks provides a cyclical backdrop, but the real test is whether that strength is durable. The key catalysts are the economic data and corporate results that will validate the consumer's staying power. This week, the focus is squarely on the December CPI inflation report and the December retail sales figures. These numbers are the first concrete tests of whether the consumer's confidence is translating into sustained spending. A cooler-than-expected inflation print and resilient retail sales would confirm the cyclical thesis and likely support the sector's momentum. Conversely, a spike in inflation or a sharp drop in sales would challenge the optimism and could pressure valuations.

Another potential positive catalyst is a shift in capital flows. The market's current record highs are concentrated in a few high-flying growth stocks, which trade at extreme valuations. As noted, COST trades at 50x forward earnings and CRWD at 75x, with the total market cap of the S&P 500 at 2.0x US GDP. If sentiment turns or if these overvalued names face a correction, capital could reallocate toward high-quality, undervalued companies. This would be a powerful tailwind for the wide-moat, on-sale stocks identified earlier, accelerating their re-rating.

The primary risk, however, is the persistence of monetary stimulus. The market's reversion to mean valuations is being delayed by what some see as a policy of "quiet default" through continued monetary expansion. As one analysis notes, the US will continue to "quiet" default through non-stop printing. This environment keeps even quality stocks from re-rating to their intrinsic value. The patient investor must be prepared for this prolonged period of undervaluation, where the business's intrinsic worth compounds while the stock price stagnates. The risk is not that the business fails, but that the market's patience runs out before the reversion occurs.

In practice, this watchlist means monitoring the economic calendar for signs of consumer durability, watching for any rotation out of overvalued growth, and accepting that the path for value stocks may be a long one. The catalysts are clear, but the risks are structural. For the disciplined investor, that is the definition of a value opportunity: a high-quality business with a durable moat, priced for perfection, while the market's mood is dictated by a different set of forces.