Be Careful, Consumer Retail's Full of Land Mines

Monday’s news that Circuit City (CC) would close 155 stores and re-negotiate leases on 566 others certainly isn’t shocking - the company has been an awful operator for several years and is one Hail Mary away from insolvency. That said, we shouldn’t ignore the potential harbinger of weakness across anything related to discretionary consumer spending.

I’m frankly amazed that consumer discretionary stocks have held up as well as they have; names like Macy’s (M) and Bed Bath & Beyond (BBBY) have rallied off their lows, and trade for market multiples or higher. However, if we look beyond the bullet points of the third quarter GDP report, we see that consumer spending fell 3.1%, the worst showing since 1980. In addition, that data points back to before the crisis really unfolded in October. In the last month, negative wealth effects have permeated all classes of investors and consumers, creating a mentality towards hoarding money over spending it.

Consequences for Portfolio Allocations

As such, I’m petrified of investing in any company generating disproportionate profits from products and services that can be put off or avoided. Over the next six months, this will happen, most threateningly amongst high-net-worth individuals, many of whom have recently become “reasonable-net-worth.”

Aside from graphics chipmaker NVIDIA (NVDA)(whose products end up in computers, video game hardware, and cell phones), and glass guru Corning (GLW), the Secular Trends Portfolio is not exposed to discretionary income. I would advise strong avoidance of consumer tech, retailing, hotel operators [such as Marriot (MAR), Starwood (HOT), or Wyndham (WYN)], and other leisure names until we have some sense of where GDP will bottom out.

Regardless of who wins today’s election, the chances of some form of tax stimulus in the coming months, is high. However, no matter how much money can be mustered up by the government, it will be a drop in the pan compared to the level of housing equity-related stimulus that consumers were pumping into the economy between 2003 and 2007. We had one $250 billion plus tax package in the summer, and we can see how that played out in terms of spending.

Disclosure: Author does not hold positions in the companies mentioned; NVDA shares are held in EpiphanyInvesting Secular Trends Portfolio.

Comments

[Warren S.:]

Consumer and online spending should jump again with the holidays coming...esp. if people decide to use online resources more than driving to the mall. I'd recommend price comparison sites like Sortprice:

www.sortprice.com/

sortprice.com

2008 Nov 04 11:35 AM

[Alan Brochs...:]

BBBY looks great to me. Their largest rival is bankrupt and closing stores. The company isn't the growth vehicle it used to be, but given its small average ticket price and the fact that sheets and towels do wear out and bridal registrants still get married, I think BBBY, which trades at 13X forward earnings and has no debt and $300mm in cash is one to own. It is the only non-dividend paying stock in my "Conservative Growth/Balanced" model portfolio.

2008 Nov 05 08:30 AM

[BlueOkie:]

PCE drives the market! We should know after Christmas shopping, if there was money to be spent.

2008 Nov 05 09:12 AM