These Beaten-Down Stocks Could Reap Monster Returns From Strong Consumer Spending

While much of the market is roiled by the idea of weakening consumer spending — and results like Walmart‘s (NYSE: WMT) have panicked investors — American Express(NYSE: AXP) recent earnings call paints a more heartening picture.

The giant payment card company reported spending by members at record levels, “led by a vigorous rebound in travel and entertainment.” CEO Steve Squeri reports that while consumers may be spending less on goods, they are increasingly spending on experiences. So while they aren’t buying as much apparel at Walmart, they are spending on travel and entertainment.

Squeri also says that this category exceeded pre-pandemic levels for the first time in April. This doesn’t necessarily mean the average consumer is splurging on plane tickets to the Caribbean or a luxury hotel when they get there, but it does mean that they are treating themselves to more affordable experiences closer to home, like dining out or enjoying a day trip. American Express is uniquely positioned to identify these trends since it has insights into the transactions and spending patterns of over 100 million consumers on a monthly basis.

With this in mind, let’s take a look at three stocks that look well-positioned based on American Express’ picture of the consumer.

Image source: Getty Images.

1. Ruth’s Hospitality Group

Ruth’s Hospitality Group (NASDAQ: RUTH), owner of Ruth’s Chris Steakhouse, can certainly provide experiences that consumers can treat themselves to on special occasions. People may not be buying as many Weber grills, but they are going out to places like Ruth’s Chris with friends and family to celebrate birthdays and other milestones.

On its latest earnings call, the Ruth’s Hospitality management team reported that sales have now exceeded pre-pandemic levels and that the company is seeing an increase in its “just because or special occasion business,” bolstering American Express’s viewpoint on the consumer. With an average check size of $83, Ruth’s Chris is not a cheap night out, but it isn’t out of the reach for the average consumer looking to celebrate a special occasion.

During the first quarter, Ruth’s Hospitality reported comparable restaurant sales growth of 41% compared to 2021 and 8% versus 2019. In addition to sitting in pole position for a resurgence in travel and entertainment spending, Ruth’s Hospitality Group is also modestly valued at just 10 times forward earnings. And it sports a juicy current dividend yield of 3.3%.

2. Texas Roadhouse

Like Ruth’s Hospitality, fellow steakhouse stock Texas Roadhouse (NASDAQ: TXRH) is in the catbird seat for a resurgence in travel and entertainment spending. Texas Roadhouse is also more affordable than Ruth’s Chris, with a per-guest average check size of $19.68, making it an option for an even wider swath of consumers to enjoy a night out.

It seems that more and more customers are frequenting Texas Roadhouse’s locations as the company reported comparable restaurant sales growth of 16% for company-owned restaurants and 20% for franchised domestic restaurants during the first quarter. Furthermore, for the first five weeks of the second quarter, the company says it saw a 9% increase in comparable sales compared to the year before. All told, revenue grew by an impressive 23% compared to the year before.

In addition to its namesake Texas Roadhouse locations, Texas Roadhouse also owns Bubba’s 33, which describes itself as “family dining meets garage bar,” a concept that should also do well in an environment where spending on entertainment is increasing. With 632 Texas Roadhouse units and 36 Bubba’s 33 units across the U.S. and internationally, there is plenty of room for Texas Roadhouse to keep growing its footprint.

Shares of Texas Roadhouse are more expensive than those of Ruth’s Hospitality Group, but they don’t look unreasonable at 17.6 times forward earnings. In addition, Texas Roadhouse pays out a dividend which now yields a decent 2.2%. Texas Roadhouse also has a sizable $300 million share repurchase program in place, and repurchased nearly $30 million worth of shares during the first five weeks of the second quarter.

3. Callaway Golf

Going out and spending on travel and entertainment doesn’t have to be limited to restaurants. Callaway Golf (NYSE: ELY) is another stock that could be attractively positioned as consumers spend more on experiences — not just because it sells golf clubs, but also because it’s the parent company of Topgolf.

Topgolf can perhaps best be described as a gamified driving range that also serves food and beverages, and over the last few years it’s become a popular destination for a day or night out. Topgolf has grown from 40 venues in 2017 to 70 at the end of 2021.

But Callaway’s ambitions for it don’t end there — it wants to double the number of Topgolf players from 28.5 million in 2021 to 57 million by 2025. The company believes that the number of Topgolf locations is only 20% of what it could be when the market is fully penetrated.

Callaway has increased its revenue at a 17% compound annual growth rate (CAGR) over the last six years, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) have grown 32% over the same time frame. The company’s goal is to grow this adjusted EBITDA from $448 million last year to $800 million or more in 2025.

Callaway isn’t valued as inexpensively as Texas Roadhouse or Ruth’s Hospitality, and it does not currently pay a dividend. But the growth potential here is immense as Topgolf grows in popularity and consumers continue to spend on new experiences.

There’s been a lot of hand-wringing about consumers spending less on goods. But American Express’ findings, coupled with details on these three stocks, show that consumers are increasingly spending on travel and entertainment. Whether they’re hitting the driving range or grabbing a tomahawk steak, they’re creating a tailwind that should propel all three of these stocks.

American Express is an advertising partner of The Ascent, a Motley Fool company. Michael Byrne has positions in Walmart Inc. The Motley Fool has positions in and recommends Texas Roadhouse and Walmart Inc. The Motley Fool recommends Callaway Golf. The Motley Fool has a disclosure policy.

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