A Play on Rising Confidence

05/29/2012 12:19 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Appliance maker Whirlpool hasn’t yet priced in the improving consumer sentiment and pickup in home buying, writes MoneyShow.com senior editor Igor Greenwald.

The Consumer Confidence Index released this morning by The Conference Board was a mild disappointment. It dipped from 68.7 last month to 64.9, with already sour perceptions of the job market and business conditions souring a bit more.

It’s not the only survey to note recent slippage in consumer sentiment: the Bloomberg Consumer Comfort Index slipped to a four-month low a fortnight ago on job worries, though it has since bounced back a bit.

The stock market might not care today because China is rolling out fresh stimulus for its own consumers, or maybe it’s just relieved Spain hasn’t collapsed over the weekend. But it’s also possible consumers are more optimistic than The Conference Board or Bloomberg polls imply, based on some other surveys out there.

Notably, the Thompson Reuters/University of Michigan consumer sentiment checked in Friday at its highest mark since October 2007, aided by much sunnier perceptions of the job market than those unearthed by The Conference Board. And that dovetails with the data from Gallup suggesting that 63% of Americans expect their finances to improve in the next year.

Crucially, the 18% who expect to be worse off in 2013 is the smallest proportion of pessimists in nine years. Gallup’s survey finds optimism about personal finances higher now than it was, for example, in 2006. And Gallup’s Economic Confidence Index is at a four-year high, though clearly Americans feel better about their own finances than about the broader economy.

How to reconcile the conflicting surveys? Perhaps the stock market should serve as the tiebreaker. And the consumer discretionary sector is now the undisputed market leader, holding up this month much better than financials, industrials, or techs.

StockCharts Technical Rank has TripAdvisor (TRIP) and Expedia (EXPE) as the strongest S&P 500 members, which is especially notable considering that discretionary spending on consumer services like travel has lagged badly since the Great Recession, acting as a major drag on economic growth. Expedia’s domestic revenue was up 11% year-over-year in its most recent quarter, and Priceline.com (PCLN) posted a 12% rise in domestic bookings.

The consumer-based strength extends beyond the travel firms and homebuilders at the top of the technical pecking order to retailers like Gap (GPS), Ross Stores (ROST), TJX (TJX), Bed Bath & Beyond (BBBY), and Home Depot (HD).

Clearly, buyers of these stocks like what they see. And what they see is an incrementally less fearful consumer continuing to spend more than last year, with the best chains doing better than that by taking market share from losers like JCPenney (JCP).

Whirlpool (WHR) has been considerably less popular of late, giving up roughly half of its huge January-April rally to fall back to the stock’s still-declining 200-day moving average. In stark contrast with the brisk trade in autos, US appliance unit sales have been down year-over-year, and investors also fear a slowdown in Brazil, Whirlpool’s key overseas market.

But the results have so far defied the fears, with Brazilians still splurging on washers and refrigerators and US price hikes sticking to boost margin. Whirlpool shareholders are collecting a 3.3% dividend yield while they wait for the US housing recovery to kick in and take appliance sales much higher. And in the meantime, the stock sells for less than ten times the recently reaffirmed 2012 earnings forecast.

The latest University of Michigan survey reported that 63% of the respondents thought this was a good time to buy big-ticket household items. That optimism should translate into stronger sales soon, given the recent pickup in home buying.

Share buyers may not wait for the good news. In Whirlpool’s case, the prospect pool includes short sellers who ramped up bets against the stock in the last month, and are now short 9% of the float.

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