Take a guess: What is the only S&P sector that’s down, year-to-date?
Consumer discretionary. It’s fallen about 4 percent, compared to the S&P 500’s 2 percent gain.
One more guess: What sector has a more bullish profile in the Weiss Ratings than the market as a whole?
You got it: Consumer discretionary.
I find the first fact somewhat surprising, frankly, because the consumer still seems in good shape. And I think that this sector’s decline in share prices is the key to understanding why the markets haven’t been able to make much headway in general thus far in 2014.
Consumer spending makes up about 70 percent of U.S. GDP. And a solid underpinning of this spending is crucial to supporting broader economic growth. But we seem to be at a crossroads in the markets, with investors still trying to assess whether the sharp rise in the major indexes last year were wholly justified, or were too aggressive.
And nowhere is this trepidation more clear than in the consumer sectors. In my view, this underperformance combined with still-solid Ratings signals an opportunity to find stocks that much of the investment community is ignoring.
Experience has taught me that the market consistently — but almost always temporarily — bails out of consumer discretionary stocks in anticipation of a downdraft in consumer spending, which never comes.
Look, it’s not gangbusters news, but we have had some encouraging economic reports over the past week that point to a resilient consumer:
- Conference Board Consumer Confidence index fell to 82.3 in April, which matched the revised number for March (implying that weather-effects did not unduly damage confidence measures based on the current and future views of consumers).
- The Employment Cost Index component of the Advance read on first-quarter GDP was up less (+0.3 percent) than analysts had been expecting (+0.5 percent), and the figure from last quarter’s final (+0.5 percent). This implies a smaller hurdle to hiring than employers had been anticipating, which should bode well for future job growth.
- March Personal Income was up 0.5 percent (better than February’s +0.4 percent), while Personal Spending was up 0.9 percent, a 50 percent overage from what analysts were expecting, and almost double the prior month’s number.
- And then we received a blowout jobs number on Friday.
All of the economic data points to a consumer who — despite a slow, plodding economic recovery — still remains in good shape to keep on spending. Even if some of the hotter stocks from 2013 need to cool off here, the downdraft of the entire sector makes me want to focus more of my analytical attention on the stocks in the sector with the highest Weiss Ratings.
And in this search, I am seeing continued strength in some of the Ratings favorites in the retailing industries within the sector:
Foot Locker (FL — Rated A+) and Macy’s (M — Rated A+) top the list, as they have for some time. Foot Locker is a dominant shoe retailer, and Macy’s is one department store chain that has weathered the storm of the past five years by conservatively managing a rebound in merchandising.
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Also near the top of the list is a furniture manufacturer:
Flexsteel Industries (FLXS — Rated A) is a small cap ($250 million) that doesn’t trade much (averages 30K shares traded per day over the past 3 months), but could be an interesting spec play for smaller positions. The company has virtually no debt, and has seen a solid improvement in ROE since 2009. The “steel” in the company’s name comes from a spring assembly it uses in its furniture seats, and is a highly-prized asset of this little winner.
Finally, the Weiss Ratings is giving high marks for major firearms manufacturers, Sturm Ruger (RGR — Rated A+) and Smith & Wesson (SWHC — Rated A). That is not always the case, as those stocks and their results have been volatile in the past. No matter what your personal views are regarding the companies’ products, and how you think demand will evolve, these are two very well-managed firms, with shareholder-friendly management teams.
With Weiss Ratings for the consumer sector running at a more-bullish level than the market as a whole, and considering the fact that the sector’s stock performance has been the worst in the market, it’s time to take a contrarian view here.
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