Seven stocks to buy to profit as Generation Z comes of age

Ulta Beauty is the stock to watch when it comes to young people shopping offline © Alamy

(Image credit: © Alamy)

published 12 June 2020

You may not care much whether you’re considered a so-called baby boomer or a member of Generation X – but it matters a lot to some. Marketers and sociologists have built whole careers slicing and dicing society into different generations and telling us how they will behave or what they will buy. Companies and investors have been trying to get in on the act too. Pick up on the trends of the future, the thinking goes, and the profits are sure to follow.

It isn’t quite as easy as it sounds, of course. Holding a broad basket of stocks linked to, say, millennial themes (millennial applies to the generation born between the early-1980s and the late 1990s) hasn’t been especially rewarding compared to investing in global markets as whole.

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Still, don’t dismiss the generation game out of hand. Each one has distinct preferences. For instance, millennials’ emphasis on personal health and dislike of alcohol has reduced demand for beer; a plethora of online food delivery services has engendered a “takeaway generation”; and their preference for shopping online has contributed to the decline of the big department stores their parents used.

Being alert to and tracking consumer shifts early has helped investors profit from the winners and avoid the losers. Generational impacts go far and wide: brands such as Gillette have struggled because people shave less these days; toy sales have come under pressure as fertility rates have slipped; and even soap bar sales are down because younger millennials in particular see them as “germ bars”.

We take nothing for granted from these young early consumers but they will come to dominate the business landscape – their thinking matters. Making an early attempt to link their perceptions and preferences with already well-regarded and successful companies could give investors’ portfolios a long-term fillip. So what do the surveys tell us? First, there are the “basic needs”, defined as electronics, cars and similar items. Then there’s the “selfie budget” which is about appearances and the perceived need to be selfie-ready – think clothes, shoes and personal care. And finally, the “social budget” which includes eating, music, movies and other entertainment.

An alternative player in e-commerce is, of course, Amazon (Nasdaq: AMZN). Gen Z can’t get enough of it. Over 50% of respondents favour it, putting it miles ahead of its nearest online rivals. It is hardly surprising, then, that it has been a top performer this year – up 34%, largely on the back of lockdown. Too high to buy? Betting against the stock has often proved costly. Most analysts are “buyers” and the target share price is higher. It is a pure growth play and it is about more than e-commerce.

An interesting exception to the inexorable online shopping trend is cosmetics: 90% of Gen Z consumers (and others) want to buy them instore. The obvious reason is that buyers can experiment and find different looks alone or with friends and the stores’ experts before buying. Another is that shoppers can be sceptical about online cosmetics’ quality and origins. The stock to watch here is Ulta Beauty (Nasdaq: ULTA). It has struggled of late and the lockdown hasn’t helped but this should turn around as people go back to work and socialising returns. Turmoil at the competing larger department stores such as JCPenney and Macy’s also bodes well.

Ulta is pushing ahead with physical sales while seeking to build on the double-digit sales growth it has generated in lockdown. It’s already the favourite destination beauty store for 40% of Gen Z. Its tech-savvy and pioneering virtual-reality make-up facility (allowing you to test make-up on digital faces) is a key plus point. I think Ulta can gain market share through innovations such as these.

What Gen Z goes on to wear its make-up with is altogether more complex. Women are increasingly opting for trainers, or at least athletic-branded shoes, and preferably Nike (NYSE: NKE). While 90% of men want trainers, now 80% of women do too. In fact, 37% of both groups veer towards athletic clothing generally, which does not bode well for the likes of Ralph Lauren. Chinos are out while hoodies and leggings are in.

But while Gen Z might be dressed for athletics, how active they really are isn’t clear. Of all teens, 94% own a videogames console. Nearly two-thirds say they’ll be buying the next consoles, which is great for the industry as a new generation launches this year. Consoles remain a popular way to play videogames. Significant numbers also play on mobile phones. Spending on the games themselves show no signs of declining from a steady $200 or so a year.

When Gen-Z is not online but out and about relaxing, it often chooses Starbucks (Nasdaq: SBUX). The firm’s ranking can be volatile, however, though Piper Sandler notes it remains the most preferred brand among teens of any quoted company. The stores have been reopening from lockdown recently and the group boasts good management, a healthy balance sheet and excellent customer loyalty. It is very strong in its key markets and has good revenue growth, proving adept at identifying new ways to grow and push expansion overseas.

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Stephen Connolly is the managing director of consultancy Plain Money. He has worked in investment banking and asset management for over 30 years and writes on business and finance topics.