2 sizzling stocks in an ASX sector that keeps defying the odds

It hasn’t been the flashiest sector on the ASX. It hasn’t led like tech or financials.

But consumer discretionary has quietly surged 17.75% over the past 12 months, despite higher rates, shaky sentiment, and ongoing cost-of-living pressures. That compares to a 10.53% gain for the broader S&P/ASX 200 Index.

So what’s driving the rally - and can it continue?

To unpack the story, we spoke with Will Mumford, Deputy Portfolio Manager at Auscap Asset Management, who believes the sector’s resilience runs deeper than short-term macro tailwinds.

In fact, he argues that some “discretionary” names are among the most stable and underappreciated businesses on the ASX.

Why consumer discretionary is still delivering

While the recent gains are impressive, Mumford says the sector’s long-term track record is even more compelling.

“Consumer discretionary has returned over 200% in the last decade, compared to the ASX 200’s 133%,” he says.

He attributes the latest leg of performance to a mix of supportive macro factors and relative appeal:

• Dominant positions of Australia’s leading retailers
• Passage of Stage 3 tax cuts
• A more supportive interest rate environment
• Recovery in the housing market
• More manageable cost inflation
• Regulatory headwinds for staples increasing the relative attractiveness of discretionary.

“Some of the challenges faced by ASX Consumer Staples businesses — particularly the regulatory pressure on major supermarkets — have likely increased the sector’s appeal,” Mumford adds.

Consumers say one thing, do another

Despite widespread concerns about cautious consumer behaviour, Australians are still spending. Mumford says the gap between sentiment and spending isn’t new - and it’s not surprising.

“If you look at Australian retail sales — even excluding the less volatile food and liquor categories — nominal sales have grown in every rolling 12-month period since 1982,” he says.

He attributes this resilience to several structural forces:

1. Population growth: Over 1 million people added in two years (more than 4%).
2. Older cohorts: Even as young renters and heavily mortgaged families feel the strain, older Australians with assets and investment income continue to spend and support the economy.
3. Essential behaviours: Many “discretionary” items are now daily necessities.

“Wesfarmers has aggressively expanded its affordable Anko range and diversified Bunnings into automotive and pet. JB Hi-Fi increasingly sells telecom products like iPhones. We view these categories as increasingly defensive and relatively inelastic,” he says.

Great businesses, not just good timing

While macro tailwinds have helped, Mumford believes business execution is doing much of the heavy lifting.

“An example this year has been Eagers Automotive. For the December 2024 half, they achieved an underlying Return on Sales of 3.3% — well ahead of the 1.2% industry average and their listed peers," he says.

It’s this level of operational outperformance that Mumford believes is often overlooked in the sector.

So who’s really winning?

Rather than focusing on the demand outlook for specific segments like travel or homewares in isolation, Mumford prefers to back high-quality businesses with clear advantages.

“We look for dominant category killers — resilient to disruption, with strong financials, transparent models, excellent management, growth potential, and reasonable valuations," he says.

Right now, the areas he finds most compelling are:

• Furniture
• Automotive
• Small appliances

Can the rally continue?

Mumford is cautious about what’s driving recent returns. While Auscap still holds several names in the sector, they’ve trimmed exposure on average over the past 12 months. That said, he sees more upside potential if key tailwinds materialise.

“Much of the sector’s outperformance has come from P/E multiple expansion - not material earnings upgrades. But the combination of continued execution on growth initiatives, further rate cuts or a stronger housing market could provide the next leg of support" he says.

2 ASX discretionary stocks Auscap is backing

1. Nick Scali (ASX: NCK)

Mumford describes Nick Scali as “one of the highest quality businesses on the ASX.”

He likes the company for its:

• Strong store-level economics
• Attractive domestic growth profile
• Founder-led management with significant alignment
• Clean balance sheet
• Attractive valuation

“If Nick Scali can successfully execute its UK expansion, the upside is material. The business is also well positioned to benefit from any improvement in the macroeconomic environment in both Australia and the UK," says Mumford.

The stock has soared nearly 37% over the past year, trades on a P/E of 22, and offers a fully franked dividend of 3.46%

2. Eagers Automotive (ASX: APE)

Eagers is Australia’s largest automotive dealership group and a structural winner in a consolidating sector, according to Mumford.

What stands out:

• Sector-leading financial metrics
• High insider ownership
• Ongoing market consolidation opportunities
• Margin expansion through tech and property optimisation
• Growth from EasyAuto123 (used vehicles)
• Leverage to the New Energy Vehicle (NEV) shift

“Eagers recently shared that while it represents 14% of all vehicle sales in Australia, it accounts for 31% of NEVs and 53% of hybrids - thanks to strong ties with BYD and Toyota. That should remain a major tailwind," says Mumford.

Eagers has soared nearly 85% over the past year, trades on a P/E of 23, and offers a fully franked dividend yield of 3.96%.