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Tom Lee: It's finally time to buy back into this sector

Strategist Tom Lee says it's finally time to get back into consumer discretionary stocks.

"We think there's a chance to come into this group," Lee said Friday on CNBC's 'Trading Nation," as he upgraded his view on the sector to overweight from neutral.

Lee, known for his consistently bullish predictions on the market, downgraded the sector in mid-November.

That turned out to be a prescient call because the economically sensitive sector is up a lagging 3 percent in the past nine months, versus a rise of nearly 7 percent for the overall S&P 500.


But now, the strategist sees many signs that the sector is set to soar.

First, while discretionary stocks still trade at a valuation premium to the overall market, their current 5 percent price-to-earnings premium is much lower than the average premium of 12 percent.

On top of that, the co-founder of Fundstrat Global Advisors observes that investors and analysts have become a lot more skeptical about consumer discretionary stocks, meaning that "discretionary is now a contrarian sector."

That means it could be set to surprise to the upside.

Finally, a historical trend having to do with volatility also points Lee toward the financials. Whenever equity volatility falls below bond volatility as it has now, consumer discretionary stocks tend to outperform, since there tends to be "a short-term rotation into growth stocks."

Within the sector, his favorite stocks include Foot Locker and Michael Kors.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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