Portfolio Strategy Weekly Audio: It s Not Too Late to Buy Consumer Stocks A 5 Minute Audio Brief

Transcription

1 Portfolio Strategy Weekly Audio: It s Not Too Late to Buy Consumer Stocks A 5 Minute Audio Brief Chris Senyek, CFA, CPA Head of Macro Research Chief Investment Strategist CSenyek@wolferesearch.com Chip Miller, CFA, CPA CMiller@wolferesearch.com Adam Calingasan, CFA, CPA ACalingasan@wolferesearch.com March 17, 2015 DO NOT FORWARD DO NOT DISTRIBUTE This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications and Other Disclosures. For Important Disclosures, please go to or write to us at Wolfe Research, LLC, 420 Lexington Avenue, Suite 648, New York, NY 10170

2 All Eyes on the FOMC and Emerging Markets We continue to call for rising global liquidity to result in additional dollar strength, low interest rates and commodity prices, expanding P/E multiples, higher stock prices, and more frequent episodic spikes in volatility in the months ahead. We attribute recent stock market weakness to falling oil prices once again sparking concerns about a potential blowup in emerging markets. We are closely watching EMBI spreads. Sources: Wolfe Research Portfolio Strategy, Standard & Poor s, Thomson Financial, Bloomberg, and FactSet. 2

3 Emerging Market Risks Contained So Far Countries at risk include those that have significant commodities exposure, are seeing sharp currency declines, and/or are quickly depleting foreign currency reserves. We re also increasingly concerned about a deteriorating situation in Brazil. We haven t seen signs of broader contagion yet. However, we re closely monitoring the situation. South Korea and Mexico are two other countries we re monitoring for contagion effects. Sources: Wolfe Research Portfolio Strategy, Standard & Poor s, Thomson Financial, Bloomberg, and FactSet. 3

4 Consumer Spending Should Pick-Up We see a number of additional tailwinds that are likely to drive stronger consumer spending trends in the months ahead, with PCE reaching 5%+ by mid It generally takes three to six months for changes in consumer confidence to impact actual spending. Our sense is that this dynamic is particularly true when more volatile energy prices are providing the upside catalyst. Sources: Wolfe Research Portfolio Strategy, Standard & Poor s, Bureau of Economic Analysis (BEA), University of Michigan, and Bloomberg. 4

5 Consumer Spending: Jobs and Food Inflation The exhibits below summarize our findings with respect to the key drivers of real personal consumption expenditures. We found the best near-term indicators tend to be tied to changes in job openings and consumer confidence. Most importantly, we believe that food inflation is the best long-term indicator of future consumer spending. Sources: Wolfe Research Portfolio Strategy, Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), Conference Board, ISM, University of Michigan, and Bloomberg. 5

6 Housing Improving We expect a reacceleration in the U.S. housing market toward mid-year to also support improving consumer confidence and spending patterns. In our view, many investors underestimate the amount of time it takes for lower interest rates and improving affordability to impact underlying housing activity levels. Sources: Wolfe Research Portfolio Strategy, Freddie Mac, Mortgage Bankers Assoc. (MBA), Nat l Assoc. of Homebuilders (NAHB), Nat l Assoc. of Realtors (NAR), and Bloomberg 6

7 Buy Autos Our most preferred Discretionary subsector is Auto Manufacturers (with Ford and GM the largest S&P 1500 weightings), given that dollar strength has typically been a harbinger of outperformance for this subgroup. Our sense is that this historical pattern will continue as a strong dollar places additional downward pressure on fuel prices. In turn, we believe this will drive sales of higher-margin SUVs and pick-up trucks. Autos was also the strongest beneficiary of lower food inflation in recent food inflation cycles. Sources: Wolfe Research Portfolio Strategy, Standard & Poor s, Bureau of Labor Statistics (BLS), and Bloomberg. 7

8 Buy Hotels and Cruise Lines We expect Hotel and Cruise line stocks to outperform into lower gasoline/food prices, and improving consumer confidence, which generally lead 5 to 11 months. Notes: The CRB Foodstuffs index in an equal-weighted average of 10 commodity prices, including wheat, corn, soybean oil, hogs, steers, lard, butter, cocoa, and sugar. Sources: Wolfe Research Portfolio Strategy, Standard & Poor s, Moody s, Thomson Financial, Bloomberg, and FactSet. 8

9 Shorts: High Capital Spending and Weak Free Cash Flow Ticker Company Sector Market Cap. ($ in millions) LTM Total Return SIM Score [1 = best; 5 = worst] Short Interest / Float % 2015E P/E LTM FCFF Yield LTM Capex / Prior 4-yr Avg KBH KB Home Cons. Disc. 1,271-32% 5 24% 15.5x -18% 483% LGF Lions Gate Entertainment Corp. Cons. Disc. 4,598 8% 5 18% 18.7x -1% 387% LL Lumber Liquidators Holdings, Inc. Cons. Disc. 1,051-64% 4 30% 14.5x -1% 358% LEN Lennar Corp. Cons. Disc. 9,952 14% 5 18% 16.1x -5% 348% CONN Conns Inc. Cons. Disc % 5 79% 10.6x -18% 347% CZR Caesars Entertainment Corp. Cons. Disc. 1,592-58% 2 44% NA 0% 295% RH Restoration Hardware Holdings, Inc. Cons. Disc. 3,570 33% 5 32% 30.1x -2% 288% DHI DR Horton Inc. Cons. Disc. 9,917 12% 5 4% 14.5x -7% 261% ASNA Ascena Retail Group Inc. Cons. Disc. 2,182-27% 5 6% 18.4x -4% 245% LTM Life Time Fitness Inc. Cons. Disc. 2,286 24% 4 12% 17.7x -5% 239% CAB Cabela's Inc. Cons. Disc. 3,946-16% 5 16% 17.7x -2% 235% ISCA Int'l Speedway Corp. Cons. Disc. 1,463-6% 3 4% 23.1x -1% 210% MTH Meritage Homes Corp. Cons. Disc. 1,744-8% 5 13% 11.9x -9% 207% LAD Lithia Motors Inc. Cons. Disc. 2,502 52% 4 6% 15.4x -1% 202% LOPE Grand Canyon Education, Inc. Cons. Disc. 2,153-3% 2 3% 17.4x 0% 198% KMX CarMax Inc. Cons. Disc. 14,233 40% 5 7% 23.3x -5% 192% FRGI Fiesta Restaurant Group, Inc. Cons. Disc. 1,710 30% 4 8% 40.9x 0% 183% Notes: Market data as of 3/2/2015. SIM = our proprietary Stock Idea Model based on five weighted and historically back tested factors, depending on the economic cycle. Sources: Wolfe Research Portfolio Strategy; Company filings; Standard & Poor s; FactSet. 9

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