Spending Revival's Winners And Losers

By James Brumley | March 25, 2010 AAA

The rising tide of consumer spending may be lifting cyclical stocks, but it sure isn't lifting the top lines for some companies who are still unable to generate sufficient revenues. No big deal, but when investors start to figure out their hot stock's new lofty price isn't supported by actual results, it could be sell off city.

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Numbers Don't Lie
We've been seeing signs of stronger consumer spending since October. The year-over-year comparisons have been positive since October, although the gains have been inconsistent. That positive spending growth trend bled into 2010 when January's data came in higher 0.5%. That was followed by a 0.3% increase in February's retail sales.

While February's savings rate isn't finalized yet, January's is. Consumer spending (dare I say revival?) passed the litmus test in January - personal saving rates are on the decline again after shell-shocked spenders retrained themselves to be savers for the better part of the prior year and a half. Now though, all the numbers suggest investors acknowledge the paradigm shift... sort of.

Most consumer discretionary spending stocks are higher year-to-date. Indeed, the S&P Consumer Discretionary Sector Index is the best-performing sector for the year so far.

Mixed Message
Remember, the consumer spending numbers are what they are, and they've been rising since October of last year. It stands to reason that, for the most part, consumer cyclical stocks should all be seeing signs of new life. However, that isn't even close to being the case.

For the first time in year, Callaway Golf Co. (NYSE:ELY) actually posted a year-over-year quarterly sales increase in the last quarter of 2009. Earnings are still in the gutter as the company had to slash costs to boost the bottom line. With increased sales and promotions, selling through at a loss still beats not selling through at all. The last thing Callaway needs is to be sitting on old merchandise once the rebound is in full swing. More importantly though, the stronger top line verifies that golfers aren't unwilling to buy goods - they just aren't willing to spend a lot on golf goods yet.

Firearms manufacturer Sturm Ruger (NYSE:RGR) is another sporting goods company with a better Q4 of 2009 than Q4 of 2008. Sales were up 9%, and earnings were higher by 24%. Analysts and investors remain pessimistic on the company, apparently ignoring the fact that Ruger grew its top and bottom line in 2008 and 2009 as if the recession never happened.

Par for the consumer discretionary course? Not so fast.

Missed the Boat
Fitness equipment manufacturer Nautilus (NYSE:NLS) somehow managed to miss the boat, posting a 16% dip in year-over-year sales last quarter. Boat manufacturer Brunswick Corp. (NYS:BC) fared even worse, with a 22% decline in revenue last quarter. Its loss almost doubled.

All these companies' products could be considered discretionary 'toys'. But, it's clear the buying public isn't feeling good about spending on all toys equally.

And here's the real stunner - NLS shares are 60% higher since the end of December. BC shares are up 35%. Yet, neither company has legitimate reasons to think things are looking better yet. Indeed, Brunswick is expects a 10% decline in boat sales this year.

What Gives?
First and foremost, let me make the big point. As evidenced by the above data, investors making a bet on a rebound in consumer spending should keep their bets focused rather than broad. Clearly, some companies are getting traction and others are not.

What I suspect is going on here, however, is a very gradual move back into the "I can afford it mindset". Callaway golf clubs and Ruger firearms cost an affordable three digit price tag per set/piece. Nautilus machines and boats come with a less-affordable four and five figure digit tag. That's a hump the average consumer apparently hasn't gotten over yet.

Just something to think about as we navigate the early part of 2010. (For further reading about consumer spending and cyclical goods, refer to Using Consumer Spending As A Market Indicator and Make Money With The Consumer Cyclical And Staple Indicator.)

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