So much for> the new era of frugality. Consumers opted to save more money in the middle of the Great Recession, but during the past few months, they ve started to reopen their wallets, albeit slowly, to buy clothing, Caribbean cruises and nearly everything in between. People who have a job are spending, says Robin Diedrich, senior consumer-discretionary analyst for Edward Jones. And while some consumer-related stocks have soared from their lows, a number of pros say there s still an opportunity for investors to take advantage of consumers refound love of spending a buck.
Analysts are keeping tabs on so-called consumer-discretionary companies, firms that (unlike, say, a company that makes toilet paper) manufacture or sell items people don t absolutely need to have immediately. Usually these stocks take off the moment investors even sniff that consumers will increase their spending, and true to form, these stocks have beaten the market since the lows of March 2009. But while retail sales are on the rise, they haven t rebounded to prerecession levels, and further sales improvement could propel the stocks higher, Diedrich says.
At the same time, many of these firms are in decent financial shape, with low debt levels and lots of free cash, says Tim Holland, comanager of the $14 million Aston/Tamro Diversified Equity fund. Corporate executives used the downturn to cut costs, so many firms could see their profits rise dramatically with just a little more sales growth. Clothing retailer Dress Barn, for instance, is doing well thanks to a combination of more people coming into its stores and its purchase of Justice, a chain aimed at tweens. Dress Barn s sales jumped 77 percent in its fiscal third quarter compared with the same time a year ago, and its profits nearly doubled.
But just as consumer-discretionary stocks tend to rise on expectations of a recovery, they re among the first to falter on signs of economic distress. Indeed, these stocks dipped this spring, when European debt woes and other economic worries weighed on investors. But for those who think the economy is mending however slowly that type of pullback can be an investing opportunity, says Andrew Beck, president of River Road Asset Management, a firm that manages $3 billion.
Stocks for a Spending Spree
The company has a big presence in Europe, where cruising remains popular despite the economic woes.
Dress Barn (DBRN)
Sales at this women s clothing chain have skyrocketed. But it trades well below its 10-year average P/E ratio.
Home Depot (HD)
The U.S.'s fourth-largest retailer has increased its dividend and improved its profit margins.