Consumers aren’t that cautious: Just ask Taylor Swift

Since the dawn of commerce, companies have grappled with a crucial question: what are consumers willing to spend their money on?

Investors often consider that mystery when assessing the attractiveness of a consumer discretionary brand. And that’s especially true today, in the crush of challenging economic conditions and with lingering concerns about declining disposable incomes.

So I decided to look for companies offering a special product or service that consumers will buy, despite the current economic backdrop.

Two stocks that fit this category are CTS Eventim and SharkNinja.

Company 1: CTS Eventim and the Taylor Swift effect

CTS is a German-listed ticketing and events business, with a market-leading position in continental Europe. And right now, the company is benefiting from the “Taylor Swift effect” – a surge in musical artists that are rushing to go on tour to replicate Taylor Swift’s huge success.

After all, in the world of streaming and diminishing royalties, touring has become an important part of an artist’s revenue mix. CTS charges a small percentage fee for each ticket bought on its platform. More tours and more tickets mean more earnings.

Coincidentally, consumers appear more than willing to pay the (sometimes) high costs to see and see their favorite artists perform. In 2023, 70 million music tour tickets were sold worldwide. That marked an 18.4% increase from 2022.

CTS is also profiting from the long-term trend of ticketing moving online. Its latest results confirmed stronger-than-expected trading in its core ticketing business. My investing group at abrdn bought the stock in December 2021. Since then, the share price has jumped an encore-worthy 72%, outperforming the benchmark by 65%.

Company 2: SharkNinja, air fryer genius

SharkNinja specializes in designing and marketing small appliances, such as blenders, vacuum cleaners, and air fryers (I’ll get to them). It operates under two brands – Shark and Ninja – with each delivering $2 billion in annual sales. Now, this is a highly competitive market with not particularly high growth. However, since its inception in 2008, SharkNinja has continually innovated and fostered an entrepreneurial culture. As a result, it has achieved a 20% compound annual growth rate in organic sales.

The business has over 900 engineers across a range of disciplines, which allows it to quickly develop products to meet changing consumer trends. To inform this process, SharkNinja collects huge amounts of data from multiple sources, both online and in-person.

For instance, by analyzing consumer trends on Instagram, the company learned that, despite the popularity of its Ninja AirFryer, the machine’s size was an issue. In response, the company launched the Double Stack Air Fryer in April. This model saves space while still delivering the same functionality as the previous iteration. And it’s proving to be popular as a result.

My team added the stock in May. Since then, it has climbed 39%, outperforming the benchmark by 32%. And sure, the shares did shed some earlier gains following recent earnings results, but I view this as a bit of overreaction and a bit of profit-taking after a strong run. I see the stock as likely having more heat in the fryer.

Zooming out: election-year fever and where to look for opportunities.

It’s been a busy year for politicians. Voters went to the polls in over 100 countries, including India, Brazil, and the US. Next year, the political calendar looks much quieter – and that’s likely to erase a layer of uncertainty and allow investors to refocus on company fundamentals. This could lead them to look further down the market-cap scale, where compelling investment opportunities abound.

In the US, it’s too early to tell what the new White House will mean for the economy, tariffs, and interest rates. However, the potential benefits of tax reform, regulatory relief, and trade policy changes could potentially create a favorable environment for select small-cap companies.

To a larger point, it’s easy to get caught up in the maelstrom that surrounds major elections. But a Bank of America Fund Managers survey shows that other factors – like company profits – matter to investments far more than which party is in power. As interest rates continue to fall, investors are best positioned in companies that are growing profits.

Historically, smaller companies have traded at a higher valuation to their bigger peers, thanks to their superior growth potential. The average 12-month forward price-to-earnings (P/E) premium for the ACWI Small versus ACWI is 25%. However, these assets are cheaper in absolute terms and well below the long-term average P/E.

In recent years, rising interest rates have been a major factor in the underperformance of small-cap stocks. But inflation is now falling toward the intended targets in most major developed economies. In response, central banks have already started cutting interest rates and are expected to trim them further in 2025. And that could be good for small-cap stocks: those firms have historically performed better after an initial rate cut. And this time is unlikely yo be any different.

And here’s one last thought: stocks have tended to struggle in a world of high interest rates. Over the past two years, there has been $178 billion in cross-border outflow from the asset class. But one area has bucked the trend: global small- and mid-cap stocks. They’ve seen a net inflow of $5.2 billion over the same period. And those inflows could continue: according to the latest BofA Fund Manager survey, small caps are expected to outperform their big-caps peers over the next 12 months.

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