The Conference Board just reported January’s Consumer Confidence Index. According to their release, the Index
[…] which had dipped in December, increased in January. The Index now stands at 60.6 (1985=100), up from 53.3 in December. The Present Situation Index improved to 31.0 from 24.9. The Expectations Index increased to 80.3 from 72.3 last month.
Furthermore, Lynn Franco, Director of The Conference Board Consumer Research Center, indicates that:
Consumers have begun the year in better spirits. As a result, the Index is now near levels not seen since last spring (May 2010, Index 62.7). Consumers rated business and labor market conditions more favorably and expressed greater confidence that the economy will continue to expand and generate more jobs in the months ahead. Income expectations are also more positive. Although pessimists still outnumber optimists, the gap has narrowed.
The jump in the Index, although expected, is quite substantial, and I project we’ll continue to see improvements in the months to come. While Consumer Confidence is a tide that lifts all boats, I believe there are a select number of stocks that will benefit the most from the particular changes in consumption patterns that can be expected in a post-recession environment.
Within the next few months, a significant driver behind consumer behavior will be the relief of a sense of repression. For the last three years, a significant proportion of the population has refrained from liberal consumption, either by action or by dissonance.
What do I mean by that? They either literally avoided buying things (action) or, if they gave in to the desire to buy something, they likely felt a level of guilt about the purchase or they opted for a lower-value replacement which was not exactly what they wanted; either way, the outcome is a feeling of dissatisfaction with the decision (dissonance).
The most common psychological reaction for consumers when they perceive the barriers that kept their desires in check are lifting is to look for compensation. That doesn’t mean everyone is going to get into a wild shopping spree. But it does mean that consumers will engage in certain consumption behaviors that they find particularly rewarding, seeking fair reparation for the abstinence they had to endure in the recent past. There will be several expressions of this behavior, which in turn will benefit companies that are well positioned to fulfill them. Let’s see:
Experiential Trade-Up: Consumers will likely allow themselves to enjoy more pleasant experiences, from shopping to dining. I believe Macy’s (NYSE:M) approachable character and aggressive marketing uniquely positions this company to benefit from this trend. The net loser: Wal-Mart (NYSE:WMT). In the dining area, Darden Restaurants (NYSE:DRI) takes the bright spot. This does not bode well for the likes of McDonald’s (NYSE:MCD); it seems it might not have been the weather what caused that missed penny in their last earnings report.
Small Indulgences: Dining out more often; adding a little luxury to life. Darden fits the bill here as well. Look for an uptick in Starbucks (NASDAQ:SBUX) and Whole Foods (WFMI). It should also benefit renowned icons of affordable luxury, like Coach (NYSE:COH).
Lifestyle Improvements: Time to do a little redecoration project, paint the living room, freshen up the bedroom or finally buy a TV for the kids. The winners: Best Buy (NYSE:BBY), Home Depot (NYSE:HD), Bed, Bath and Beyond (NASDAQ:BBBY) and, yes, Sears (NASDAQ:SHLD).
Travel: Stay-cations should give way to an increase in domestic travel. No surprise Southwest Airlines (NYSE:LUV) is investing aggressively in advertising these days. Starwood Hotels (NYSE:HOT), Walt Disney (NYSE:DIS) and Priceline (NASDAQ:PCLN) should see a welcomed surge in customers.
Cars: Not exactly a small indulgence, but low interest rates, plenty of credit and exciting new models turn this big ticket item into a purchase of low perceived risk and easy to justify for starved consumers. I am really excited by the prospects of Ford (NYSE:F). Ford has not only a fantastic product line: its advertising is absolutely spot on (I’ll discuss that in a future article) and it’s brilliantly leveraging the ‘digital’ mindset of today’s consumers.
I am sure –and counting on it - that readers will add their own suggestions to this list. This ought to be an interesting discussion!
Disclosure: I am long JPM.