(XRT) Report Shows U.S. Consumer is Alive and Kicking

On Thursday, I wrote a piece titled “The Seven ‘C’s’ of Recovery Optimism” with my last, and possibly weakest, point for the continuing economic expansion being the resiliency of the American consumer. Today, I will highlight where the strong consumer is spending her money and how that’s driving the earnings and stock prices of several top companies.

First, a few points about where I got this wrong and where I got it right in the last two years. This is what I said yesterday about my previously cynical view of the consumer’s ability to recover from the credit crisis: “Here was one I got way wrong in 2009 and 2010. I thought the American consumer would be slow to spend again as she reconstituted her balance sheet and her debt. Her death was greatly over-exaggerated and it seems she is as strong as ever.”

Then when I looked back at my articles and trades for 2010, I discovered that I actually got this trend right for most of that year. In March of 2010, with the SPX hovering around 1175 (its 52-week highs since the 08-09 bloodletting), I wrote a piece of analysis for The Options News Network titled “7 Reasons the S&P 500 is Going to 1300.”

Then came Deepwater Horizon, the Flash Crash and the seasonal selling mood of spring time. The broad market index instead made a bee-line for 1000. But the bullish forces I outlined resumed their power and we hit 1260 by year-end, and the 1300 mark by late January of this year, about nine months after that forecast.

Still No. 7 and Still Strong

My number 7 reason then was the same as this week’s: the American consumer is alive and kicking. Here’s how I described the situation in March of 2010:

“This one caught me by surprise late last year. In October (2009), I was certain that retail stocks were overpriced and I said to avoid them in favor of sectors and groups that were not dependent on the consumer: industrials and materials, infrastructure plays, biotech, emerging markets, agriculture, and enterprise technology. But staying with retail has been a winning bet because the alleged death of the American consumer was premature.

Government retail sales figures have surprised month after month, as well as company earnings from stores themselves quarter after quarter. If this is how bad it gets during the worst housing meltdown, foreclosure crisis, and highest unemployment in decades, it leaves me asking how much upside is possible as these problems self-repair.”

Since the August 2010 lows, consumer stocks have participated in the broad market rally as well, if not exceedingly better, than any sector. Let’s look at the ETFs representing consumer discretionary/retail spending for the performance numbers since last summer’s lows:

SPDR Retail Index (XRT) went from $36 to $56, a 55.5% surge

Consumer Discretionary Select Sector SPDR (XLY) went from $29 to $41, a 41% gain*

Retail HOLDRS (RTH) went from $85 to $115, a 35% return

Technology Select Sector SPDR (XLK) went from $20 to $27, also a 35% pop. I include technology, of course, because this ETF has consumer/retail exposure through big holdings like Apple (AAPL), Microsoft (MSFT), and AT&T (T). I will also mention the XLK again in a moment for another reason.

*To compare apples to apples, the XLY is one of the nine major market sector ETFs in the Standard and Poor’s Select Sector SPDRs classification. For the last 52 weeks, XLY gained almost 29%, second only among the nine to Energy (XLE) at 44.5%, and just beating my other two favorite sectors, Materials (XLB) at 28.46% and Industrials (XLI) at 25.3%.

Why ETF Investing Works, If You Don’t Want To

The numbers above make a great argument for one of my strongest beliefs about investing. For conservative long-term capital, balanced allocation and cyclical rotation among sector ETFs is a no-brainer when you don’t know what to do with your money.

In March of 2009, when I first went on national television as a market analyst and had a chance to speak to millions of investors in a given week, I took the opportunity during that historic, once-in-a-generation, “everything must go” market to essentially tell investors, “If you can’t pick stocks right now, at least put long-term money into vital economic sectors that will certainly be much higher five years from now like Energy, Technology (XLK), and Biotech (IBB).” The 50% to 80% gains in those sector ETFs speak for themselves of the simple power of this investing approach.

Of course, I ignored Consumer Discretionary and Retail sectors in 2009 (I can’t get everything right). Thank common sense, and simple observation, that I stopped that foolishness in 2010.

Before we get to specific stocks in these sectors, allow me to break down some of the major differences between these “big 3” retail ETFs. The XLY includes industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing.

The index includes McDonald’s, Walt Disney, Comcast, Home Depot, Ford, and Target in the top ten. But its top fifteen percentage performers for the past 52-weeks — with fantastic gains from 58% to 141% — are a “who’s who” of the top retailers of entertainment, hip apparel, luxury items, travel, and cars, including, in order of said performance, priceline.com (PCLN), Netflix (NFLX), Chipotle (CMG), Abercrombie & Fitch, Tiffany, AutoNation, CBS, Wynn Resorts, Coach, Polo Ralph Lauren, Amazon.com, CarMax, Macy’s, Limited Brands, and Bed Bath & Beyond.

Most of these big winners were found early in their advance in the past two years by a particular stock-picking system which has generated 28% annual returns since 1988. I’ll share that system and fourteen of its current #1 consumer/retail picks — for no charge — in a few minutes.

Luxury Predator on the Mag Mile

I also did a little anecdotal research to find out why the stocks of luxury retailers like Coach (COH) and Tiffany & Co. (TIF) should have done so much better than those of Walmart or Target when it seemed to me in 2009 that the easy “pairs trade” was to short Fifth Avenue and buy Main Street, based on a retrenching consumer.

My expert in the field — a 30-something female shopaholic who stalks Michigan Avenue and the Chicago suburban malls like a ruthless predator of the finer things — told me that Coach and Tiffany did something unprecedented in the past couple of years. They “brought down the shelves” to Main Street, she said, by offering new luxury products at lower price points.

This meant she could buy a $400 Coach bag and feel just as classy as the woman with the much more expensive Louis Vuitton bag. And Tiffany made life easier for your average husband or boyfriend by creating signature bracelets under $200.


The other two consumer/retail ETFs are good to compare and contrast to understand different ways they offer investment exposure in the space. The Retail Holders (RTH) is a fund with only 18 stocks evenly balanced between consumer cyclicals (discretionary) and non-cyclicals (staples).

RTH is thus considered more diversified than XRT which is weighted 80% toward discretionary names. Wealth manager Gary Gordon, President of Pacific Park Financial calls the RTH the best “offense-defense” play because of this balance. He looks at RTH as being a combo XLY and Consumer Staples (XLP) choice and highlights the benefits you gain through stable dividend income.

Ringing the Register with Consumer/Retail Earnings Machines

But if you are serious about really beating the market, especially as the broad indexes look destined to trade sideways in the third quarter just as they did in the second, then you have to be a stock picker. And if you are going to pick your own stocks — and you want to find those 50% to 150% winners noted above — you have to have a system with robust screens that alerts you to earnings momentum when it is beginning.

Why is this so important? Because earnings momentum is the single most powerful factor affecting stock prices. And this momentum is best predicted by upward revisions to analyst earnings estimates.

What makes this work for stock prices is this fact: institutional buying of stocks tends to be preceded by upward earnings estimate revisions. You want to be in front of the big portfolio managers and it’s easy to do if you have a screen that alerts you early to upward shifts in earnings estimates and likely actual momentum.

While the big elephants of the market take their time lumbering in to new earnings movers following upward estimate revisions, you have time to get in ahead of them. Trading this way, in 1-3 month windows around every earnings season, has been proven highly successful by a system with 28% annual returns for the past two decades.

The Zacks Rank stock rating system is built on just such a robust fundamental earnings screen. Here are 14 top consumer/retail stocks currently with a #1 Rank (strong buy) from that system:

Bed Bath & Beyond (BBBY)
Cost Plus (CPWM)
Crocs (CROX)
Foot Locker (FL)
Green Mountain Coffee Roasters (GMCR)
Hansen Natural (HANS)
Lululemon Athletica (LULU)
Macy’s (M)
Rue21 (RUE)
Saks (SKS)
Starwood Hotels & Resorts (HOT)
Steve Madden (SHOO)
Tiffany & Co. (TIF)
VF Corp (VFC)

Michigan Sentiment Drops a Bomb in the Mall

Need another reason to be very selective in your stock-picking and to focus on the earnings machines? Friday’s consumer sentiment number from The Thomson Reuters/University of Michigan survey fell to a two-year low of 63.8 in July from 71.5 the prior month. The consensus expectation was for something a little closer to 72. Ouch! Rick Santelli, live on CNBC from the CME trading floor (my old haunt), was beside himself after this number. The man is rarely shocked by much.

So the question is, “Will investors and consumers be shocked and go into a spending freeze?” Hard to know. What you can know is where to find the strongest stocks to put your money by following the clear trail of earnings momentum. Charge on, American consumer, charge on.

Disclosure: I have no positions at time of publication in any stocks mentioned.

Kevin Cook is a Senior Stock Strategist for Zacks.com

BED BATH&BEYOND (BBBY): Free Stock Analysis Report

FOOT LOCKER INC (FL): Free Stock Analysis Report

LULULEMON ATHLT (LULU): Free Stock Analysis Report

MACYS INC (M): Free Stock Analysis Report

TIFFANY & CO (TIF): Free Stock Analysis Report

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