Consumers Still Consuming

03/25/2013 7:00 am EST

Focus: STOCKS

Jim Farrish

Founder and CIO, Jim's Notes

Consumer discretionary stocks have been in a solid uptrend since October 2011, but the question is how long consumers will continue to spend, writes Jim Farrish on Jim’s Notes.

The consumer has been the focus of many economist and analyst alike. Each week there is a new challenge facing the consumer and their ability to spend. As you can see from the chart below the consumer discretionary stocks have been in solid uptrend since October 2011. The short-term trend off the November 2012 low has accelerated again off the recent test in February. That begs the question once again, can or will the consumer continue to spend?

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I have argued for the last two quarters this has been a sub-sector or individual stock picking sector. The volatility of the sector is obvious in the chart, most of which has come from the media speculation of specific events hurting the consumer at various levels.

Breaking the sector down, we can see where the leaders versus the laggards. For example the Morningstar consumer services sub-sector (only 8 stocks focus on the likes of zip car) during the same period of the chart above is actually negative. And the Morgan Stanley Consumer Index outperformed the S&P Consumer Discretionary chart above by more than 5%.

One sector, which has been surprisingly strong has been the grocery stores. In the last eight weeks five stores have gained better than ten percent. Safeway (SWY) and Kroger (KR) lead the list. Again, the point is specific components of the sector have been the leaders.

PowerShares Food & Beverage ETF (PBJ) has been a leader since January as well gaining more than 15%. General Mills (GIS), Jack-in-the-Box (JACK), and Smucker’s (SJM) have been solid leaders in the ETF. The fund is weighted towards the consumer staples or durable-type stocks, which have been strong since January.

The specialty retailers have been the biggest laggard in the sector. A recent jump in a few stocks, like Tiffany (TIF), have helped the results look better overall, but the sector continues to struggle to gain any upside traction.

Thus, the media has been right on one hand to worry about the consumer as they have become more ‘discretionary’ or specific in their spending. That makes our job as investors more of a challenge. But, if the phrase follow the money every applied to a sector for investing purposes, this is one that it definitely applies.

NEXT PAGE: An ETF to Play the Upside

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The consumer staples sector I favor the group as a whole. The SPDR Consumer Staples ETF (XLP) is the choice to play the continued upside. The uptrend of the sector has been consistent with low volatility since the low in December. The chart below shows the ETF and the uptrend. If there is a pullback in the sector short term, I would view it as a buying opportunity looking forward. Scanning the holdings in the ETF you find only a handful of the 39 stocks that are not in a defined uptrend. The durable stocks are considered to be the defensive stocks in the sector as the provide everyday products that consumers “have” to have. Watch and ride the trend.

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The consumer discretionary side of the equation is more of what I look at a stock picking sector currently. In scanning, SPDR Consumer Discretionary ETF (XLY), you find a more diverse picture relative to trends. The current leader since January is Best Buy (BBY). When you think of doing well with the consumer, that is not exactly a stock that jumps to the forefront. Dollar Tree (DLTR) recently gapped higher on earnings, but has stalled at the 200-day moving average. The upside is favored based on the consumer getting hit with higher taxes, higher gasoline prices, and higher food costs. It remains a stock on my watch list to follow through on the upside. Automotive and media have been moving up recently and are worth reviewing. Time Warner (TWX), Discovery (DISCA), and Comcast (CMCSK) remain in solid up trends, along with Dephi (DLPH) and O’Reilly (ORLY). The chart at the beginning of this post is XLY and shows the trend, plus the volatility.

The consumer is still alive despite the news. The impact of the higher taxes and gasoline prices have taken their toll on spending, but the uptrend in the sector overall remains intact. It is worth building a watch list of ETFs or indexes to track. When they start moving higher, dig into the parts as this remains a stock picking sector for now.

By Jim Farrish, Founder & CIO, Jim’s Notes

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