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After the historic run-up it delivered in 2013 (best year since 1997), the S&P 500 index is taking a well-deserved rest as we begin 2014. I say well-deserved because in the breakneck action that rounded out last year, more attention was paid to pure price momentum than to fundamental strengths of underlying companies. The current consolidation may give us a great chance to take some profits as well as pick up some new positions.
I’m looking forward to the earnings season kicking off tomorrow with Alcoa (AA — rated C)’s report, then building to a peak over the next four to six weeks. Q4 earnings look like they will be mainly in-line or ahead of expectations for the largest companies, like those in the S&P 500 Index, over the period. However, I think that the entire stock market’s short-term reaction — both for large-caps, and small-caps — will be far more influenced by 2014 outlooks delivered mainly by the larger players.
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| Never bet against the American consumer’s propensity to spend. |
By my reckoning, S&P 500 earnings, on average, are expected to rise in the high single digits this year. But I’m eager to incorporate any new information I can glean from upcoming reports. I still feel that investors should be positioned with an emphasis on economically sensitive sectors going into 2014, because when we review the year at this time next January, we’ll see that the slow start was merely an opportunity to get more pro-cyclical exposure.
The sector I’m intently looking at this week (and where I just made a new addition in the Weiss Million-Dollar Ratings Portfolio) is consumer discretionary. It seems the old adage about never betting against the American consumer’s propensity to spend remains intact. Regardless of a pattern of job growth in the country that seems anemic relative to other periods of economic rebound, consumer sentiment and willingness to use credit cards remain solid.
This week, we’ll get the first jobs report of 2014. If it is stronger than expected (economists are currently anticipating about 195,000 jobs were added, slightly above the three-month average pace), we may see a rally in consumer shares. And we can find them among the top-rated stocks in this sector.
Among all consumer discretionary stocks (all-cap, all volume, etc.), the situation looks relatively positive as we begin 2014. Although the list has more “Sell” Ratings in it than “Buys,” this is actually an improvement of sorts over the past several months. I am only interested in larger-capped stocks, and when we knock the sub-set of smaller companies’ stocks out of the entire model’s results (dropping stocks with market caps less than $1 billion, in this example), the situation improves markedly — with more than four times as many “Buys” than “Sells” and a decent momentum going into the new year.
I think this market meandering we’re watching could be a great time to increase exposure to discretionary stocks. Consider the top five consumer discretionary stocks in the Ratings Model’s results (all rated A+) for near-term purchase:
- Foot Locker (FL), a dominant, category killer that is growing despite a seeming obstacle, like its strong mall-based presence.
- VF Corp (VFC), a world-class apparel maker manufacturing world-class brands, and doing so in a sustainable, long-term way financially.
- Viacom (VIA), the “B” shares of which are the most tradable variety (VIA.B), is a world-class entertainment content provider.
- La-Z-Boy (LZB), a world-class furniture manufacturer. While any slowdown in housing turnover may scare investors here, the company blew away last quarter’s earnings expectations in November. I think they will again in February.
- Sturm, Ruger (RGR), a controversial pick for some, but just like the above, it is a world-class company, which consistently delivers value to shareholders over time.
Because the last of the top five may not be in some investors’ investable universe, I’ll also give you the No. 6 stock in the list. It’s TJX Corp (TJX), which operates as an off-price apparel and home fashions retailer. Another of the Ratings Model’s elite, it, too, is a firm that is managed to rival the best-run peers in the world. That’s a clear theme I detected as I crunched the raw Ratings Model results this week.
The other part of the equation I’m working on is ticket size. Yes, consumer spending will continue strong for the year, and will be conspicuous in the near term. But investors need to position somewhat away from consumer goods with big tickets — homes, boats, even cars to some extent — and to position more fully to companies selling lower-ticket wares in the near term. Services are another way to go, but I found their representation in the top-rated stocks to be lacking. So I think I’ll just keep watching that subset for now.
Keep a close watch on this Friday’s market. With the December jobs report coming out at 8:30 a.m., I think it’ll be telling.
Best wishes,
Don
