With the biggest shopping season of the year just around the corner, we thought it would be timely to highlight some consumer sector companies that look attractive according to The Applied Finance Group’s (AFG’s) criteria for investment opportunity attractiveness, as they are in line to benefit from the upcoming seasonal spending patterns. The list of companies we have provided look the most attractive within the AFG consumer sector in terms of valuation attractiveness, economic performance, and overall investment attractiveness relative to their peers.

One of the companies that we feel particularly confident in is the retailer Kohl’s (KSS) which is currently a holding in The AFG 50, (a model portfolio of 50 large cap stocks designed to help Portfolio Managers save time, make more informed investment decisions, and outperform their benchmark). We are confident about Kohl’s competitiveness because they have a strong cash flow, strong execution, and have been outperforming their competition.

Monday brings the long awaited release of 'Call of Duty: Modern Warfare 2'. Gamestop will be opening its stores at midnight to meet demand and has seen record breaking pre-order levels. They are also bringing in new management, most recently ex Handango CTO Shawn Freeman.

The short base has been rising steadily over the past few months, currently standing at 16.6%. This is just over one third of the available inventory. Short sellers have made their views clear - but any change in sentiment may result in a rather crowded exit.

Boston Scientific Company (BSX) – Shares at the medical device maker slumped to a five-month low this morning despite reporting a return to profitability albeit on underwhelming revenues and predictions for more of the same. Shares fell 15.7% to $8.58 and stand 27% lower than a 52-week high made at the end of August. Option volume today of 58,000 contracts is five times the usual average and counting. However, we did note some activity that indicates investors do not feel ultra-bearish on the prospects for the company’s share price looking forward. The November 9 strike put options were the single-most trafficked contract and there appeared to be a willingness to write puts rather than buy them. Volume of 4,700 changed hands throughout the day with investors exchanging premiums of anywhere from 30 to 75 cents. At worst they see shares falling no further than $8.25 by expiration. Those options in Monday’s session were priced at just a dime. Volatility on the options did decline a little after earnings to 41%.

GameStop and other high street game retailers rely on video games being distributed and sold in cardboard and plastic and there is a lot of reasons to think that this practice is at the start of a very significant decline. In fact physical inventory for content in this industry may well be about to go the way of the Dodo. And all because online distribution is better:

Bloomberg quantifies the consensus analyst rating for a stock on a scale of 1 (worst) to 5 (best). Stocks with a 5 rating have 100% buy ratings. We recently calculated the historical consensus ratings for all S&P 500 stocks and found the average daily consensus rating for the entire index going back a year. As shown below, the consensus analyst rating for all S&P 500 stocks drifted lower with the overall market during the bear, but it bottomed about a month after the market bottomed back in March. Interestingly, it picked up along with the market throughout the spring and early summer, but when the market stumbled in July, analysts got really bearish and then stayed bearish even as the market turned around and went higher. Finally in mid-August, analysts began to believe in the rally again, and since then they've been upping their stock ratings. Currently the consensus analyst rating for stocks in the S&P 500 is 3.74 (out of 5).

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The Institute for Supply Management has released its latest services sector report, and the results were encouraging: The group’s non-manufacturing index indicated that service sector activity expanded in September for the first time in almost a year.

The index rose to 50.9%, slightly above the 50% mark that is the demarcation between an expansion and a contraction. The index’s data subsets painted a picture of a service sector in which demand is picking up, but prices are tumbling — ISM’s business activity index rose to 55.1% and its new orders index rose to 54.2%, but the group’s price index fell from 63.1% in August to 48.8% in September.

The Pittsburgh Post Gazette this week reported on the latest figures from the National Retail Federation that concluded spending in the months of November and December (excluding cars, gas and restaurants) should hit $437.6 billion. That compares to $441.97 billion in holiday 2008 spending, and $457.75 billion in 2007. If correct, this year will mark the slowest holiday season since 2005, when sales totaled $433.66 billion, and it would be the first consecutive decline in 40 years.

From the Pittsburgh Post Gazette:

A trip through the mall tells the story: The recession of the past two years has devastated the retail industry, as overspent consumers have put away their credit cards, started paying off years of debt, and put the kibosh on shopping.

[Slide Show: 10 Retailers Gaining Strength From the Recession.]

Shares of videogame publisher THQ Inc. (THQI) surged on almost four times the average daily volume on September 22. What the heck was happening to justify that type of volume?

Well, it was none other than renewed buyout speculation. I have consistently stated that consolidation in the game publisher sector is desperately needed ahead of the next console cycle, which I expect to begin in 2012.

The videogame console cycle for investors in the big three independently traded software publishers (Electronic Arts, Activision Blizzard, THQ) has almost been a complete bust. I say almost as the merger between Activision and Blizzard (division of Vivendi at the time) in 2008 was a seminal moment for the industry, not only creating an industry titan but also marrying two different spectrums of the gaming industry (console and online). That said, I have an inkling that the fortunes (i.e. financial numbers) of the publishing sector are about to be reignited, and it could actually start to be borne this holiday season.

Price cuts have begun for current generation consoles, initially for the Xbox 360 and recently the Playstation 3. The lower comparatively priced Nintendo Wii should also receive a price cut long before not as the phenomena of motion sensor gaming dies and some other way to drive units is needed to move Nintendo's first-party software (Mario Brothers, for example). Collectively, by my estimation, there have been 108.0 million units of the Xbox 360, Playstation 3, and Nintendo Wii sold since 2005. By comparison, the Playstation 2 has sold about 138.0 million units from its launch in 2000.

Sentiment

Morning trading was sluggish Monday, but the major averages battled back from modest early losses and are trading a bit higher late in the day. With no economic data to guide morning trading, some of the focus was on overseas markets.

Benchmarks were broadly lower across the Asia/Pacific on concerns about an escalating trade war between the US and China. The US imposed tariffs on Chinese made tires. China is opening an anti-dumping investigation related to auto and poultry products. Hong Kong's Hang Seng lost 1 percent and Japan's Nikkei sank 2.2 percent. Major averages were broadly lower across Europe as well.

U.S. retailers posted their best sales in over a year. Sales at stores open more than a year, a key measure of retailer's health, fell by 2.9 percent, marking a 12th consecutive decline. However, the decline was better than the 3.8 percent drop expected by investment analysts.

It could be argued that the retailers only beat estimates because of the dismal year-over-year comparisons. We would rather leave that debate to more "learned" investors than ourselves. Instead we would like to concentrate on how those retailers beat expectations. How? Pure and simple: demographics!

4:14 PM, Aug 31, 2009 --

• NYSE down 65.8 (0.9%) to 6,643.24.
• DJIA down 47.9 (0.5%) to 9,496.
• S&P 500 down 8.3 (0.8%) to 1,021.
• Nasdaq down 19.7 (0.9%) to 2,009.

GLOBAL SENTIMENT

The anticipated growth of internet-enabled TVs in the next four years would likely increase the popularity of digitally downloaded movies, TV shows and video games while dampening sales related to DVDs, blu-ray discs, video game discs, and other physical content formats, according to Retailer Daily.

GameStop Corporation (GME), the biggest video game retailer, reported dismal second-quarter results with a low-single-digit decline in the top line, but a double-digit fall in the bottom line. These were driven by sluggish demand for video game consoles and new software due to the lack of a popular game title release.

However, the company’s share in the new video game market increased by 2.0%.

“GameStop, tough day for them, reporting second quarter profit, down 32%. $39 million was the figure. They had fewer hit video games and a 14% drop in same-store that’s forcing the company to cut its full year outlook. Wall street hates that as you can see by a 7% give back there.” –CNBC’s Closing Bell 8/20/2009

F2Q09 Earnings Call

August 20, 2009 11:00 am ET