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Get Four
|  | FEBRUARY 18, 2005
Shopping Tips for Consumer Stocks Though the group has underperformed slightly, S&P's Thomas Graves regards outfits like Claire's Stores and Guitar Center as strong buys U.S. consumers are fashion-conscious and fascinated by the latest in digital electronics -- but still price-sensitive. So says Thomas Graves, Standard & Poor's group head for analysis of consumer-discretionary stocks, which have been modestly underperforming the broader market recently. And he predicts that consumer spending will rise more slowly in 2005 than it did last year. However, of the 297 stocks covered by his group, S&P has strong buy recommendations on 15, he reports. These include Best Buy (BBY ), the leader in consumer-electronics retailing; restaurant stocks Steak 'n Shake (SNS ) and Red Robin Gourmet Burger (RRGB ); Harrah's Entertainment (HET ); Claire's Stores (CLE ); and Guitar Center (GTRC ). Although there has been some concern about the high level of consumer debt, especially with interest rates rising, Graves doesn't expect rates to increase enough to be a significant hindrance to consumer spending. These were a few of the points Graves made in an investing chat presented Feb. 15 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff, the moderator. Edited excerpts follow. AOL subscribers can find a full transcript at keyword: BW Talk. Note: Thomas Graves is an S&P Equity Research analyst. He has no ownership interest in or affiliation with any of the companies under discussion in this chat. All of the views expressed in this chat accurately reflect the analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this chat. For required disclosure information and price charts for all S&P STARS-ranked companies, go to spsecurities.com and click on "Investment Research" and then on "Required Disclosures & Standard & Poor's STARS vs. Closing Prices Charts." Q: Tom, consumer spending seems to be holding up pretty well. How are the consumer stocks doing these days? A: Consumer stocks are doing O.K. You're correct, consumer spending is holding up reasonably well, although we don't expect spending to grow as strongly in 2005 as it did in 2004. Overall, through the end of last week, consumer-discretionary stocks had modestly underperformed the broader market year to date. Looking ahead, we recommend that equity investors have a market weighting in consumer-discretionary stocks, which means that we would neither significantly overweight nor significantly underweight equity exposure to the sector. Q: Basically, the stocks you cover are of companies whose products people don't have to buy. What has been doing best in the area? A: One group that has performed well in early 2005 is stocks in the retail apparel area. Stocks that we're currently recommending purchase of in apparel retailing include Chico's FAS (CHS ) and Abercrombie & Fitch (ANF ). Q: What about consumer electronics? A: Consumer electronics was in the news today. Circuit City Stores (CC ) received indication of a $17-per-share buyout. We think such an offer will provide a catalyst for change at Circuit City. But fundamentally, we believe the company will continue to struggle against industry leader Best Buy (BBY ), on which we have a strong buy recommendation. We have a hold opinion on shares of Circuit City. Q: Do you have other strong buys elsewhere in the sector? A: Yes, we do. Among the 297 consumer-discretionary stocks we're covering here, we have a strong buy recommendation on 15 of them. In addition to Best Buy, our strong buy recommendations include two restaurant stocks -- Steak 'n Shake (SNS ) and Red Robin Gourmet Burger (RRGB ). Q: What does the trend among consumer-discretionary stocks tell you about consumer preferences nowadays? A: In the retail area, we have seen some strength among high-end retailers, and we also believe that discount-oriented retailers are gaining market share from areas such as department stores. Overall, we believe that U.S. consumers have become more fashion-conscious within the past year but remain relatively focused on prices before making purchases. Q: Are consumers going for luxury merchandise? A: We do see some strength in sales of luxury merchandise. One stock that we like in that area is Coach (COH ), on which we have a buy recommendation. However, not all consumers can afford to buy luxury goods. This is one of the reasons we continue to see growth at companies such as Wal-Mart (WMT ) and Costco (COST ). Q: What stocks do you personally cover in the group, Tom? A: My personal coverage emphasis is hotel and gaming stocks. My favorite stocks include Harrah's Entertainment (HET ) and Carnival (CCL ). We have a strong buy opinion on HET and a buy opinion on CCL.
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