PDD Holdings Inc. (PDD): Is this consumer staples stock worth investing in now?

We recently made a list 10 Best Consumer Stocks to Buy, According to Hedge Funds. In this article, we take a look at how PDD Holdings Inc. (NASDAQ:PDD) compares to other stocks in the consumer discretionary industry.

Many experts and analysts are concerned about a slowdown in consumer spending. However, reports show that consumer behavior is changing, not slowing down. Foot traffic in retail stores increased by 4.4% in June, indicating strong consumer activity despite flat overall sales, according to a report by Colliers Retail Market Intelligence.

While furniture and home improvement stores saw declines due to reduced monumental purchases and a sluggish housing market, grocery and clothing stores fared better. Grocery sales rose 1.7%, with foot traffic up nearly 5% as consumers managed their budgets despite cost-cutting. Apparel sales also rose 3.8%, driven by early back-to-school shopping and wardrobe updates, which led to an 8.3% increase in foot traffic.

Consumer spending rose slightly in July compared with June, with growth in 10 of 12 retail categories, according to the CNBC/National Retail Federation (NRF) Retail Monitor. Retail sales, excluding autos and gasoline, rose 0.7% month over month, down slightly from June’s 0.5%, but year-over-year growth slowed to 0.9%, down from June’s 3.4%.

Core retail, which excludes restaurants, saw a monthly gain of 1%. Notable sector results included a 3.4% increase in sales at gas stations and a 2.1% increase in spending at restaurants compared with the previous month. Meanwhile, the health care, personal care and gardening sectors saw small declines.

The June and July data combined indicate that consumer spending remains resilient, supported by strong household finances and a strong labor market. While some sectors, notably furniture and home improvement, are struggling due to weakening consumer confidence and a sluggish housing market, other categories are doing well.

The data suggests that consumers are still willing to spend, especially on essential and seasonal items, although they may be more cautious about making larger purchases. Despite some pockets of decline, the overall retail environment appears stable, with consumers continuing to spend where they see value, pointing to a cautiously optimistic outlook for the rest of 2024.

The latest updates on interest rates and the potential impact on consumer spending

At the July meeting, Fed Chairman Jerome Powell emphasized that the Fed remains focused on achieving maximum employment and stable prices. He noted significant progress in the economy, with inflation falling from 7% to 2.5%, and the labor market in balance, with unemployment low at 4.1%. The Fed decided to hold interest rates steady in a range of 5.25% to 5.5% and continue to reduce its holdings of securities to maintain a contractionary stance aimed at matching supply and demand and reducing inflationary pressures.

Powell mentioned that while inflation has fallen, the Fed is not yet ready to cut rates and needs more consistent positive data before it makes such a move, likely as early as September. According to the CME Fed Watch Tool, all experts expect rate cuts in September. 50.5% of experts predict a 25 basis point (bps) rate cut, while 49.5% expect a 50 bps cut.

Interest rate cuts tend to have a positive impact on consumer spending. When interest rates are lowered, borrowing becomes cheaper, which can lead to an increase in borrowing and consumer spending. This increased affordability can boost consumer confidence and promote spending on discretionary goods. This is a good setup for discretionary stocks, and with that, let’s take a look at the 10 best discretionary stocks to buy, according to hedge funds.

Our methodology

For this article, we used Finviz’s stock screener to identify over 50 large-cap consumer stocks, then narrowed our list to the 10 stocks that were most widely held by institutional investors in the first quarter, and sorted them by rising hedge fund sentiment.

Why are we interested in the stocks that hedge funds invest in? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

PDD Holdings Inc. (NASDAQ:PDD)

Number of hedge fund owners: 76

PDD Holdings Inc. (NASDAQ:PDD), formerly known as Pinduoduo, is a global e-commerce powerhouse. The company operates Pinduoduo, a well-known e-commerce platform in China that is known for its wide range of products and unique team-buying model that enhances the shopping experience by encouraging group purchases. Additionally, the company operates Temu, an international online marketplace focused on delivering high-quality, cost-effective products to consumers around the world. It is the 6th best consumer stock on our list.

In Q1, 76 hedge funds invested in PDD (NASDAQ:PDD) with positions worth $5.8 billion. As of March 31, Hillhouse Capital Management is the largest investor in the company with a stake worth $1.37 billion.

PDD (NASDAQ:PDD) has been making significant inroads into the e-commerce world, particularly through its Temu and Pinduoduo brands. The company’s success in the e-commerce sector can be traced back to its early focus on rural areas and smaller cities in China, where it built a significant presence. Unlike its competitors, which focused primarily on larger urban centers, the company has tapped into a market hungry for affordable products in less saturated areas.

PDD’s (NASDAQ:PDD) innovative approach, which includes a bulk-buying model that lets customers combine orders and secure lower prices, quickly resonated with shoppers looking for savings, making it one of the top e-commerce platforms in China.

Building on its domestic success, PDD (NASDAQ:PDD) expanded internationally by launching Temu in the U.S. in 2022. Despite being a relative newcomer, Temu has made impressive progress. By September 2023, Temu had attracted 82 million active users in the U.S. alone and had achieved over 250 million downloads globally, mostly from the U.S. market, according to Business of Apps, a B2B media and information platform.

Temu’s approach focuses on offering a selection of products at competitive prices, with delivery times of around a week. This model places an emphasis on value for money and sells good quality, generic goods at lower prices than many other retailers.

PDD’s (NASDAQ:PDD) ability to deliver both value and convenience sets it apart in a crowded e-commerce landscape. As Temu continues to grow and strengthen its position internationally, it is building on the successful strategies it has employed in China, positioning the company as a formidable player in the global e-commerce market.

In its fourth quarter 2023 investor letter, Baron Emerging Markets Fund provided the following information regarding PDD Holdings Inc. (NASDAQ:PDD):

“We have expanded our digitalization theme by building a presence in PDD Holdings Inc. (NASDAQ:PDD), a leading Chinese e-commerce platform. Founded in 2015, the company has grown to become the second largest e-commerce player in China, capturing approximately 20% market share. We believe PDD’s competitive advantage lies in its collaborative purchasing model, which facilitates bulk purchasing through direct partnerships with manufacturers, thereby eliminating middlemen (e.g. distributors and agents) and reducing costs. Key factors driving the company’s meteoric rise include rising consumer demand for affordable products in China amidst the economic slowdown, small sellers seeking alternatives to Alibaba, and improved management execution. PDD’s revenue growth is outpacing gross value growth due to rising collection rates as sellers aggressively compete for consumer traffic on the platform. We believe PDD should continue to gain market share given its dominance in the value-for-money segment, growing offering of affordable branded products, and strong operational efficiency.” We believe the company’s growth will be further supported by the recent launch of its international e-commerce platform, Temu, which has become one of the fastest growing apps in the world. By leveraging excess Chinese manufacturing capacity, Temu has a strong negotiating position with domestic suppliers and attracts global consumers with competitively priced products. Temu’s recent initiatives to improve unit economics, combined with achieving a variable break-even point in the large US market, demonstrate management’s ability and commitment to sustainable growth. We expect PDD to at least double its earnings and free cash flow over the next three years, with the potential for further capitalization appreciation thereafter.”

Total PDD takes 6th place on our list of the best consumer stocks to buy according to hedge funds. You can visit 10 Best Consumer Stocks to Buy, According to Hedge Funds to see other consumer discretionary stocks that are on the hedge fund radar. While we recognize PDD’s potential as an investment, our belief is based on the belief that AI stocks are more promising in terms of delivering higher returns and doing so in a shorter time frame. If you’re looking for AI stocks that are more promising than PDD but are trading at less than 5 times earnings, check out our report on cheapest AI action.

Also read: Analyst sees new $25 billion profit ‘opportunity’ for NVIDIA, and Jim Cramer recommends these 10 stocks in June.

Disclosure: None. This article was originally published on Insider Monkey.