APRIL 25, 2003
INVESTING Q&A
Consumer Stocks Keep on Rolling | S&P's Thomas Graves sees consumers continuing to spend, albeit not quite so vigorously, and suggests a few stocks that will benefit
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Consumers may not spend as robustly in 2003 as they have in recent years, but their confidence should turn up from the recent dip. And that leads Standard & Poor's to recommend that investors overweight stocks of the consumer discretionary sector in their portfolios. So says Thomas Graves, group head of the S&P analysts covering consumer discretionary stocks, who finds a number of attractive stocks in that area.
Among the names on his buy list are AutoZone (AZO ), Federal Signal (FSS ), Gannett (GCI ), Lennar (LEN ), Newell Rubbermaid (NWL ), P.F. Chang's China Bistro (PFCB ), Procter & Gamble (PG ), Quiksilver (ZQK ), SCP Pool (POOL ), Staples (SPLS ), and Viacom (VIA.B-- recently upgraded).
At the other extreme, one very well-known name on Graves's sell list is Starbucks (SBUX ), which he sees as having near-term risk on the downside because of its lofty valuation.
These were a few of the points Graves made in an investing chat presented Apr. 22 by BusinessWeek Online and Standard & Poor's on America Online. He was replying to questions from the audience and from Jack Dierdorff of BW Online. Following are edited excerpts from that chat. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Note: Thomas Graves is an equity analyst at Standard & Poor's. He has no ownership interests in or affiliation with any of the companies that are under discussion today. Other parts of Standard & Poor's may have a relationship with companies that are under discussion. He is a registered representative of Standard & Poor's Securities.
Q: Tom, the broad market behaved quite nicely today. Do you at S&P think we might have finally turned a corner?
A: We do believe that the market has probably seen its lows for the time being, and we are expecting it to move higher in the months ahead.
Q: S&P identifies two kinds of consumer stocks -- discretionary (for which you're in charge) and staples -- what's the difference?
A: Discretionary stocks are ones related to companies that are likely to benefit more from sizable changes in the economic outlook. In comparison, the consumer staples area focuses more on products such as food and drugs that are going to be needed by consumers in any type of economic environment.
Q: What weighting does S&P recommend now for consumer stocks? And how are they doing relative to the market?
A: We're recommending that investors overweight their position in consumer discretionary stocks. Recently, on a year-to-date basis, the consumer discretionary group was outperforming the broader market.
Q: If S&P still suggests overweighting consumer-discretionary stocks, you must expect the consumer to keep up the amazingly long run of spending -- is that correct?
A: We don't expect the consumer to fuel the economy as much in 2003 as during the last couple of years. However, we do look for consumer confidence to improve, and we do see enough attractive stocks within the sector to recommend overweighting investors' presence in this area.
Q: What do you think of Hershey Foods (HSY )?
A: Hershey Foods is actually a consumer-staples stock, but I can tell you that our recommendation on Hershey is to hold the stock. Earnings for the first quarter were as expected, and we're looking for the company to earn $3.50 a share in 2003.
Q: Please share your perspective on Sara Lee (SLE ).
A: Sara Lee is another consumer-staples stock. And in this case, we have an accumulate opinion on the stock, which means that we are looking for it to outperform the S&P 500 in the next six to 12 months.
Q: In the craft space, Michaels Stores (MIK ) and Jo-Ann Stores (JAS.A )?
A: Michaels Stores is a stock that we like. We do have an accumulate opinion on it. In the most recent quarter, which ended in January, they reported earnings per share that were 6 cents above our estimate. With Jo-Ann Stores, we don' have an analyst opinon on the A shares.
Q: Your opinion on YUM Brands (YUM )?
A: YUM Brands is one of the leading fast-food companies in the world, and we have a favorable opinion on the stock. We're advising people to accumulate the shares.
Q: What do you think of BJ's Wholesale Club (BJ ) on a long-term basis?
A: Our feeling is that the warehouse-club industry is becoming increasingly mature, and BJ's is not one of our favorite stocks in the group. In fact, we are advising people to avoid the stock. We prefer shares of Costco (COST ), on which we have a hold opinion.
Q: Can we detour into autos briefly? How would you rate Ford Motor (F )?
A: We see shares of both Ford and General Motors (GM ) as being adequately priced at current levels. We're telling investors to avoid shares of DaimlerChrysler (DCX ), on which we have an avoid opinion.
Q: Over into travel, how about the big merger Carnival (CCL ) just completed?
A: Carnival has increased its already leading position in the cruise-ship industry through its merger with Princess. In our view, however, there's likely to be some near-term pricing pressure for cruise-ship companies, and we think this will limit the amount of profit growth that Carnival is likely to show in the current fiscal year. We have a hold opinion on Carnival but believe that both the company and the stock should benefit from longer-term demographic trends in which baby boomers are increasingly part of the customer mix.
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Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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