The service sector is a massive and growing part of the U.S. economy. A 2016 Forbes article cheekily called the service sector “the only important part of the U.S. economy” and suggested it should take center stage when gauging the financial strength of the country.
There are plenty of publicly traded companies making tremendous amounts of revenue in the space. This opens the door to investment opportunities that are hard to ignore. However, not all consumer services stocks are created equal. Some investments in the space have the potential to generate compelling gains, but others will result in significant declines.
So, as is the case when investing in any sector, it’s important that you choose which service sector stocks to buy wisely. But how do you go about finding the best stocks in such a vast sector?
5 Best Consumer Services Stocks to Buy
Between shipping services, communication services, financial services, health care services, and a wide range of other service companies listed on U.S. stock exchanges, options in the service sector are plentiful. However, this can also make drilling down to where you should invest your money difficult.
The five stocks mentioned below are some of the top stocks to watch in the services space:
1. Amazon.com (NASDAQ: AMZN)
With a market cap of more than $1.84 trillion, Amazon.com is one of the largest companies in the world. The online retail giant has become a household name in the United States by providing a simple yet intuitive e-commerce website that features hard-to-beat deals and industry-leading shipping times.
From an investor’s perspective, Amazon.com is a company that’s known for generating strong revenue growth and complete dominance in the e-commerce space. In fact, according to Statista, in 2021, the company’s market share of the United States online shopping market is expected to be a whopping 50%, with its share of the U.S. retail market as a whole coming in at around 32%.
That’s right, Amazon.com controls more than half of the e-retail market in the largest economy in the world, offering both consumer staples and consumer discretionary products. That’s an incredible statement to make.
Moreover, while the COVID-19 pandemic proved to be a major hindrance to revenue and net income growth among many publicly traded companies, Amazon.com didn’t skip a beat. Prior to and throughout the global health crisis, the company has consistently generated strong net income and revenue growth.
The reason is simple.
Prior to the pandemic, experts were already noticing a pretty strong shift toward online shopping and away from the brick-and-mortar experience, but the coronavirus has sped up this trend.
Before the crisis, there were quite a few consumers who simply wouldn’t give online shopping a chance. They liked to see and feel the products they were purchasing before they pulled out their wallets. Many of the consumers who were married to the traditional shopping experience are older and also happen to be at the highest risk for severe COVID-19 symptoms.
The virus and fear of its ability to spread led many of these consumers to shop online and, with Amazon.com being the leader in the space, the company became a clear beneficiary of the trend. As a result, the stock has seen tremendous gains.
While the COVID-19 pandemic isn’t going to last forever, the exposure to online shopping that the virus led to will likely have long-lasting positive effects on Amazon.com and others in the e-commerce industry.
Beyond the pandemic, there’s a good reason for Amazon.com’s leadership in online retail services. The company spent billions of dollars early on, expanding its infrastructure and focusing on delivering products to consumers as quickly as possible. These investments have paid off, with Amazon.com offering a best-in-class user experience and ultimately resulting in its leadership within its category.
With a strong history of leadership in its space, best-in-class infrastructure, and a history of dramatic net income and revenue growth, Amazon.com is already a stock that’s hard to ignore. Add in the fact that the company has proven resilient during the coronavirus and resulting economic hardship, and the stock is clearly one of the best plays on the stock market today.
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2. McDonald’s (NYSE: MCD)
McDonald’s is the leading fast-food chain in the United States and around the world. With the company operating within the food service industry, the COVID-19 pandemic sent the stock to multiyear lows early on.
However, that has already changed in a big way, with the stock making nearly a full recovery since the start of the crisis.
While the shutting down of the economy in the U.S led to dramatic reductions in sales for the fast food chain, that trend proved to be short-term. As the economy reopened, same-store sales began to skyrocket, starting the stock’s recovery. Now, growth seems to have normalized and the stock is acting as though COVID-19 never happened.
Beyond the strong COVID-19 recovery, McDonald’s is a long-term play with incredible potential. There are perks to being the largest fast-food chain in the world. As a result of its longstanding leadership in fast food, the company has brand equity and an economic moat that are impossible to discount.
As consumers continue to venture back out into the world, they are likely to find solace in what they know, and with McDonald’s strong history in the food service space, it will continue to be a go-to option, leading to continued sales growth and positive movement in the price of the stock.
Moreover, McDonald’s isn’t just a services stock; it also fits perfectly within the dividend stocks category. The company has consistently shown its appreciation for its investors through the payment of dividends every quarter for quite some time now. The company has increased its dividend annually for the past nine years, even managing to maintain this record throughout the coronavirus. Although it doesn’t have the highest dividend yield on the market, the figure comes in at 2.19%, which is nothing to sneeze at.
McDonald’s has built a company that has made it through some of the toughest economic times in history. Consistent smart moves by management and its standing as a household name in the U.S. have given McDonald’s a level of resilience that’s not often seen in the food service industry.
All in all, when talking about McDonald’s, you’re talking about one of the largest and most iconic companies in the world that has become the top consumer choice for warm food that’s served up quickly. With the strong recent revenue growth, a history of investor appreciation, and a leadership role within the hospitality and services industry, MCD stock is one to pay close attention to.
3. Costco (NASDAQ: COST)
Costco is one of the largest chains of warehouse stores in the world and has become an important part of the shopping experience for consumers across the United States. Offering steep discounts on bulk purchases from groceries to clothes, electronics, home goods, consumer staples, and more, the company has the equivalent of a real-life pay wall. In order to access the discounts offered by Costco, consumers pay between $60 and $120 per year for a membership.
The membership plan has worked well for Costco. At the close of the third quarter, the company had generated about $901 million in paid membership fees.
Moreover, when you pay for a membership, you want to use it. After all, nobody likes to spend hard-earned money and get nothing in return. As a result, the company benefits from shoppers that are loyal to the club, leading to revenue of well over $150 billion per year as consumers shop in their stores.
At the same time, that revenue is growing rapidly. In the third quarter, net sales were up more than 21% year over year.
While the coronavirus has been a painful reality for retail services as a whole, Costco has had an incredibly strong performance. As an essential business, the company was able to keep its stores open through the pandemic. So, same-store sales continued to grow as if nothing ever happened.
Moreover, now seems to be the perfect time to jump in. The stock had a hiccup earlier in the year, resulting in significant declines. While it has recovered, there’s a strong argument that the stock is still trading much lower than it should be, suggesting that buying at these low levels offers a steep discount and making the stock a perfect play for value investors.
All in all, when you buy Costco stock, you’re buying shares in a company that has become a staple in United States retail services. The company has a massive audience of paying members and continues to see growth in not only memberships but also revenue and earnings, which remained true even in the midst of a global health crisis. That type of strength makes Costco a stock that should not be ignored.
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4. Walmart (NYSE: WMT)
Sticking to the topic of retail services, Walmart is a natural leader. Before the Internet changed the way consumers shopped, Walmart was there, amassing thousands of locations across the United States.
As Amazon.com carved out the online retail niche, brick-and-mortar retailers struggled. That is, with the exception of Walmart. The company has two important advantages going for it that create the economic moat that famed investor Warren Buffet often talks about:
- Early Infrastructure Investments. Early on, Walmart built the ultimate retail infrastructure. As the company continued to generate impressive profits, it also invested massive amounts of money into new stores and distribution centers to keep those stores full of products. As a result, shopping at Walmart became the norm for many people. Human beings are habitual creatures, and breaking the habit of looking to Walmart as the go-to store for everything from home goods to groceries, electronics, movies, and more is a tall order.
- Online Transition. When Walmart noticed that the online shopping trend had the potential to cut into its growth, it acted quickly. While Amazon.com is still the top dog in e-commerce, Walmart.com is a clear second after surpassing eBay and taking more than 7% of the total e-commerce market share, according to eMarketer. With continued investments in e-commerce, Walmart continues to gain market share year after year.
Walmart has done well throughout the COVID-19 pandemic as an essential business. Because of the company’s leadership in the grocery category, stores needed to stay open to supply food to the masses throughout the coronavirus crisis. As a result, the company was able to maintain growth in same-store sales, revenue, and earnings, beating both top-line and bottom-line analyst expectations in the second quarter.
Not only has the company maintained strength throughout the COVID-19 pandemic, but it has also continued to show investor appreciation through the payment of dividends. According to Nasdaq, the company has consistently increased its dividend payments year over year since 2013.
Walmart has become a household name as a result of massive investments in infrastructure that have given consumers across the country access to their stores, and the company has such a strong presence in retail that it’s able to offer lower prices than most other retailers. This strength is nothing to sneeze at, and, combined with a proven resilience through the course of the COVID-19 pandemic, it makes WMT stock one for the books.
5. Walt Disney (NYSE: DIS)
Walt Disney is a household name in the U.S. and around the world. The iconic entertainment company is responsible for Mickey Mouse and a slew of other well-known brands in entertainment, both cartoon and in living flesh.
Due to the COVID-19 pandemic, the company took a powerful hit. Forced to shut down its theme parks and retail stores, revenue slumped dramatically in both the second and third quarters of 2020. Unfortunately, so did the value of the stock.
However, Walt Disney has made a tremendous comeback. Not only has the stock made it back to pre-pandemic highs, but it’s also climbed more than 25% from pre-pandemic levels, reinforcing previous assessments that the COVID-related declines represented nothing more than a discount.
Although the company won’t be serving its full capacity of customers in its theme parks for some time to come, it’s important to remember that theme parks are only a fraction of the company’s services.
Walt Disney recently made a splash when it jumped into the streaming entertainment space with Disney+ and ESPN+, taking its share of the market from the likes of Netflix. These streaming ventures continue to be a success as COVID-19 led more people to look for in-home entertainment options while reducing costs by cutting the cable cord. Not to mention, the company also owns Hulu, one of the largest streaming video players on the field.
So, while Walt Disney continues to work toward a recovery in theme park revenue, the company is an entertainment powerhouse with plenty of ways to make money. This, combined with a strong history of leadership in entertainment, a strong balance sheet, and expanding leadership in the streaming video space, suggests that Disney stock has the potential for continued gains ahead.
Pro tip: Before you add any stocks to your portfolio, make sure you’re choosing the best possible companies. Stock screeners like Stock Rover can help you narrow down the choices to companies that meet your individual requirements. Learn more about our favorite stock screeners.
Invest in Consumer Service ETFs
Investing in individual stocks can be a daunting process for the newcomerer investor. If you’re not well-versed in stock market research, or simply don’t have the time it takes to do your due diligence, there’s another option.
There are several exchange-traded funds, or ETFs, on the market today that pool funds from a large group of investors that are used to make investments according to the ETFs investing strategy. These ETFs address various investing styles, sectors, and risk appetites.
So naturally, there are plenty of ETFs that were designed specifically to provide investors with diversified exposure to consumer service stocks. By investing in these ETFs, you’ll be investing in a diversified portfolio chosen by some of the most highly respected professionals on Wall Street.
Nonetheless, if you go this route, it’s important to keep in mind that you’ll still need to do some research. Prior to investing in any ETF, take a moment to look into the fund’s historic performance, expense ratio, and investing strategy to get a good understanding of exactly what you’ll be investing in.
COVID-19 has changed the shape of the service industry as we know it. Some of these changes — like a shift to online shopping and work-from-home opportunities — are likely to stay for the long haul, creating compelling investment opportunities in companies that serve these markets.
At the same time, there are some short-term changes that have devalued stocks, which are now poised for a strong recovery. People aren’t going to stay home forever. Discounts created among leaders of the consumer service industry represent opportunities for strong potential gains ahead as consumers with pent-up demand emerge following the COVID-19 pandemic. Once again, this opens up its own set of strong investment opportunities to consider.
No matter which direction you go, you have the opportunity to find success. However, there is also always the risk of loss. Always take the time to research investments before making them and keep in mind that educated investment decisions generally relate to profits.
Disclaimer: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.