According to Dolphin Research, a well-known investment research institution, the cyclical consumer stocks in the US stock market are expected to rebound strongly in 2023 after ending at a disappointing low point in 2022. Despite the significant rebound of some stocks in this industry, there are still many long-term investment opportunities to be explored. The stock analyst team at Dolphin Research stated that consumer stocks with strong fundamentals, such as Nike (NKE.US) and Harley-Davidson (HOG.US), are currently trading at extremely low valuations, indicating significant upside potential.
Undoubtedly, the technology stock investment frenzy triggered by the AI boom has been the hottest investment theme in the US stock market this year. However, the soaring valuations of technology stocks driven by the AI boom have made many retail investors hesitant. Data shows that the PE valuation of the Nasdaq 100 Index, a global technology stock benchmark, is currently at a historical high, close to the 90th percentile.
The retail investor confidence survey data from the American Association of Individual Investors (AAII) has attracted attention. As of the week ending on August 30, the proportion of retail investors bearish on the US stock market has increased compared to early August, with nearly 35% of retail investors being bearish on the market. This bearish sentiment is higher than the historical average. Moreover, during the week ending on August 23, the proportion of bearish investors exceeded the proportion of bullish investors for the first time since June.
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In contrast, stocks with favorable valuations and excellent fundamentals in the cyclical consumer sector undoubtedly present better investment choices. Jefferies analyst John Hecht pointed out, &#34;Artificial intelligence is undoubtedly a very popular innovation at the moment. This technology will undoubtedly change the world to some extent, but it does not mean that everything related to artificial intelligence is without risks.&#34;
Erin Lash, the director of consumer industry stock research at Morningstar Research Services, wrote, &#34;Despite the unfavorable macroeconomic situation and recent uncertainties, there are still ample investment opportunities in the US stock market, such as cyclical consumer stocks.&#34; &#34;The US Cyclical Consumer Index compiled by Morningstar outperformed the broader market in the second quarter, with a 5.4% increase, which is 260 basis points higher than the S&amp;P 500 Index. The median valuation of stocks in the cyclical consumer sector is 18% lower than our fair value estimate, and 52% of the stocks we cover are in the 4-star or 5-star range.&#34;
Looking at the whole year, as of August 24, the Cyclical Consumer Index has risen by 28.1% in 2023, while the US Market Index compiled by Morningstar has only risen by 16.4%.
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What are cyclical consumer stocks?
Morningstar states that this industry includes retailers, automobile and auto parts manufacturers, restaurants, accommodations, and entertainment companies, which exhibit cyclical consumption patterns. Specific companies in this sector include Amazon (AMZN.US), Home Depot (HD.US), and Starbucks (SBUX.US), among other consumer giants.
Undervalued high-quality cyclical consumer stocks
Morningstar has identified the most undervalued stocks in the consumer cyclical index, with Morningstar ratings of 4 or 5 stars. As of August 24th, Morningstar identified 44 stocks that meet this criterion, but they further selected those stocks that have received a &#34;wide&#34; rating for Morningstar Economic Moat, indicating that they possess a sustainable competitive advantage expected to last at least 20 years. Historically, stocks that have both a wide economic moat and are undervalued have outperformed the broader U.S. market.
Here are four undervalued cyclical consumer stocks with a wide economic moat, as selected by Morningstar:
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Morningstar states that the most undervalued stock among them is Etsy, with a trading price 50% lower than the fair value estimate by Morningstar analysts. Nike is relatively less undervalued, with its stock trading price underestimated by approximately 27%.
Etsy (ETSY.US)
Fair value estimate: $145
Etsy is one of the top ten e-commerce operators in the United States and the United Kingdom, with a significant presence in Germany, France, Australia, and Canada. The company dominates an advantaged niche market by connecting buyers and sellers through its online marketplace for vintage and handmade goods. It has established itself as one of the largest players in the rapidly growing sector, generating revenue from listing fees, sales commissions, advertising services, payment processing, and shipping labels. The stock has experienced a decline of nearly 38% this year, with a closing price of $74.635 as of last Friday.
&#34;We believe Etsy's competitive strategy is sound, as this fast-growing company capitalized on the surge in demand caused by the COVID-19 pandemic. During the height of the pandemic, Etsy was one of the few stores where consumers could purchase masks.&#34;
Despite a decline in mask sales, the platform has maintained its stickiness, with Etsy's comprehensive active buyer base reaching 95 million by the end of 2022, roughly the same as in 2021, more than double the pre-pandemic figure. As the market tends towards brand marketing to enhance its proactive awareness, investing in platform search functionality and filtering, and reducing friction caused by purchasing activities through its buyer protection program and better platform regulation, we believe there is a viable path to achieve mid-single-digit growth in average annual spending per buyer over the next decade.&#34; Morningstar stock analyst Sean Dunlop said.
Polaris (PII.US)
Fair Value Forecast: $171.00
Polaris' main business is the design and manufacture of off-road vehicles, including all-terrain vehicles and side-by-side vehicles for recreational and utility purposes, snowmobiles, as well as on-road vehicles including motorcycles, and related replacement parts, clothing, and accessories. The company entered the marine market after acquiring Boat Holdings in 2018, providing an opportunity for a new sub-segment of the outdoor lifestyle market. It has risen 15% this year, with the closing stock price as of last Friday at $114.010.
&#34;Polaris is one of the longest-operating companies in the power sports sector. We believe its brand, innovative products, and lean manufacturing have created a wide economic moat, and the company will profit from its R&amp;D, reliable quality, excellent operations, and acquisition strategy.&#34;
&#34;With the continued easing of supply chain constraints, we expect market share to further increase in 2023 as availability of certain products improves. We believe the sustained recovery of previously moderate market share losses will demonstrate the company's intact competitive advantage.&#34; Morningstar senior stock analyst Jaime M. Katz said.
Harley-Davidson (HOG.US)
Fair Value Forecast: $46.50
Harley-Davidson is a leading global manufacturer of heavyweight motorcycles, merchandise, parts, and accessories. Harley-Davidson Financial Services provides wholesale financing to dealers and retail financing and insurance brokerage services to customers. It has fallen 17% this year, with the closing stock price as of last Friday at $34.210.
&#34;Harley-Davidson has a long manufacturing history, brand strength, and dealer network, which gives it a wide economic moat and a dominant position in the U.S. motorcycle market.&#34; Morningstar senior stock analyst Jaime M. Katz said.
Nike (NKE.US)
Fair Value Forecast: $136
&#34;Nike is the world's largest sports footwear and apparel brand. Its main product categories include basketball, running, and soccer. Footwear accounts for about two-thirds of its sales. Its brands include Nike, Jordan, and Converse. Nike sells its products globally through company-owned stores, licensed stores, and third-party retailers. The company also operates e-commerce platforms in over 40 countries. Almost all of its production is outsourced to contract manufacturers in more than 30 countries. It has fallen 12% this year, with the closing stock price as of last Friday at $102.360.&#34;
&#34;We believe Nike's strategy allows it to maintain its leadership position. Over the past few years, the company has invested in direct-to-consumer channels while reducing many wholesale accounts. In North America and other regions, the company has decreased its exposure to integrated retailers while increasing its partnerships with smaller-scale retailers that bring the Nike brand closer to ordinary consumers, offering the full range of products and allowing for better control of brand messaging. Nike's consumer plan is driven by its 'Triple Double' strategy of doubling down on innovation, speed, and direct consumer engagement. This plan includes cutting product development time in half, increasing the number of members on the Nike mobile app, improving the way key franchises are curated, and reducing styles by 25% to achieve a more focused approach.&#34; David Swartz, Senior Equity Analyst at Morningstar, stated.

Renowned investment research firm Morningstar recently released a report stating that cyclical consumer stocks in the US stock market, after reaching a disappointing low point in 2022, are expected to experience a strong rebound in 2023.

If you are afraid of high valuations in US tech stocks, you might want to consider these four undervalued consumer stocks.