Consumer rebound: 4 investing themes to watch

By Mark Jewell
AP Personal Finance Writer

BOSTON (AP) — Mutual fund investors looking to capitalize on consumers’ growing confidence would do well to comparison-shop. And they should do so as intently as if they’re bargain-hunting in the grocery aisles.

Sure, it’s easier to find good investments among retail and other consumer stocks now that shoppers are easing the firm recessionary grip they’ve had on their wallets.

But beware if you’re expecting economically sensitive stocks of companies peddling luxury and leisure items to race ahead of consumer staples like soap and soda pop, now that consumer spending has risen five straight months. Coming out of this recession, many fund managers are expecting a more subdued rebound than usual for niceties such as vacation cruises, new cars and shoes with three-figure price tags. Consumers’ recent cost-consciousness has become ingrained, they say.

And after a runup this year for stocks that rely on discretionary spending, it may be harder now to find as many bargains. After all, stock movements typically anticipate shifts in the economy six months or so in advance. Fund managers aren’t abandoning consumer staples stocks, whose fortunes rest on stable demand for essentials like laundry detergent and food. With markets down sharply this week, they’re looking like even safer havens than usual.

“After people had been feeding on credit so long, there just isn’t as much disposable income to go around,” says Frank Ingarra, co-manager of the $161 million Hennessy Cornerstone Value Fund (HFCVX).

It has a heavier-than-usual weighting in consumer staples stocks, including such names as packaged food makers Kraft Foods and Sara Lee. “People have realized, ‘Maybe I don’t need to buy the $200 shirt, I can buy the $100 shirt,’” Ingarra says.

Still, the comeback for consumer spending has been strong across the board. In the first quarter, spending rose by the fastest pace in three years, helping the economy grow at a 3.2 percent pace.

A big component of spending, retail sales, has been a bright spot. Revenue at stores open at least a year surged 9 percent in March, the fastest growth in 11 years. Consumers took a breather in April, when growth was a more modest 0.8 percent. But a slew of retailers raised earnings outlooks, anticipating the consumer comeback will have legs despite high unemployment.

Consumer confidence is up as well, and the consumer savings rate is retreating after rising earlier in the recession.

Such changes in consumer behavior have lifted discretionary stocks that got hammered early in the recession. Mutual funds specializing such stocks are up nearly 15 percent so far this year, the second-biggest gain among 21 domestic fund categories that Morningstar tracks. Consumer staples are laggards with a 4.5 percent year-to-date rise.

Although further gains may still be ahead for consumer stocks, here are four factors investors should weigh:

1. Pay attention to price: Consumer staples stocks are now priced cheaper than their historic averages, measured against expectations of future earnings, according to Consumer Edge Research, which tracks consumer stocks and spending trends. Although consumer staples’ price advantage has recently diminished, the Stamford, Conn.-based firm expects those stocks will remain relatively cheap, in part because they have lagged the market this year.

2. Dining in versus out: Beverage stocks are Consumer Edge Research’s current favorites, including such names as Coca-Cola, Hansen Natural, Anheuser-Busch InBev and Molson Coors Brewing. That’s because people who opted to eat at home earlier in the recession have been dining out more.

But diners are still cost-conscious. Consumer Edge notes consumers have lately been choosing beer over wine to save money.

The growth in restaurant spending comes at the expense of packaged food makers, who prosper when more people eat in. Consumer Edge noted an April slowdown in that category’s sales, which is why the firm is cautious about packaged food stocks like Tyson Foods and Del Monte Foods.

3. How to go global: Even with the U.S. economy rebounding, experts expect faster growth overseas, particularly in developing economies in China, India and Brazil. But you don’t have to look for foreign stocks or funds with an international tilt to profit from overseas consumer demand. America is home to the world’s biggest consumer stocks — think of Procter & Gamble, Colgate-Palmolive and Coca-Cola. Their strongest sales growth is overseas, so you’ve got plenty of global consumer exposure if you or your fund own their stocks.

“In the U.S. and western Europe, consumers aren’t going to be buying more toothpaste per person,” says Bob Lee, manager of the $1.3 billion Fidelity Select Consumer Staples (FDFAX), which recently counted P&G and Coca-Cola as its top two holdings. “But in poorer countries like Brazil and India, the typical consumer would like to trade up to a brand-name toothpaste, if they could afford it.”

4. Staples are safe: For risk-averse investors, consumer staples are looking better than more volatile discretionary stocks after recent days’ sharply falling markets. Lee’s fund limits itself to staples, which also appeal to investors needing a reliable income stream. That’s because staples stocks are more likely to pay dividends.

“Consumer staples are kind of like a tortoise rather than a hare,” Lee says. “But over long periods, they’ve done very well for their shareholders.”