October 20, 2015 / 5:43 PM / 2 years ago

Not all U.S. consumer stocks included in analyst love fest

By Chuck Mikolajczak
    NEW YORK, Oct 20 (Reuters) - Consumer discretionary stocks
entered the quarterly reporting season on a hot streak: The
sector, up for three weeks, is the best performer this year, and
earnings expectations are the most optimistic for any sector.
But some early results and closer analysis suggest investors
should tread carefully.  
    Most of the gains have been in online retailers and auto
parts companies, and fewer than half the companies in the sector
have advanced at all this year.
    Furthermore, some early earnings reports have not been
encouraging. With about 20 percent of consumer discretionary
companies having reported their third-quarter results, a
majority have failed to meet expected sales growth targets, even
as more than half beat profit forecasts. 
    As Wal Mart Stores Inc demonstrated dramatically
last week with a disappointing earnings report and its worst
selloff in a quarter century, traditional retailers are facing
challenges. 
    Additionally, a tepid U.S. retail sales report showed that
an expected big bump in spending, due to cheap oil and an
improving economy, has yet to transpire amid sluggish world
growth and a strong dollar.  
    
    SANGUINE ABOUT SOME
    "The idea of buying the group because the normal economic
model says that when unemployment drops and economies expand,
discretionaries and retailers are great buys - it is not proving
to be as true unless you have the right names," said Rick
Meckler, president of investment firm LibertyView Capital
Management in Jersey City, New Jersey.   
    Analysts have the highest hopes for internet-savvy companies
that target higher-income consumers and are somewhat buffered
from wage and currency pressures.  
    Overall, they continue to be enthusiastic about the sector,
making the case that an improving U.S. economy coupled with
falling gasoline prices should give consumers more disposable
income to spend.
    "The early indications are they will probably be one of the
bright spots in terms of year-over-year growth," said Sameer
Samana, global quantitative strategist at Wells Fargo Investment
Institute in St. Louis. 
    Indeed, earnings per share in the sector are expected to
grow 10.7 percent over the same quarter last year, making it the
strongest of all 10 sectors on the benchmark S&P 500 index
.
    The S&P consumer discretionary index has
appreciated about 9 percent for the year, easily outperforming
the 1 percent decline in the broader S&P 500. The narrower S&P
retail index has jumped about 19 percent this year.
    
    LAGGARDS
    But retailers like Gap Inc, which has lost about 37
percent, Staples Inc, which has shed 30.7 percent, and
Bed, Bath & Beyond, down 23.5 percent, have seen their
shares suffer this year, and serve as a warning to investors
expecting gains throughout the sector.
    On the flip side, much of the group's advance has been
powered by direct online retailers such as Netflix,
which has rocketed more than 100 percent this year, Amazon.com
 up over 80 percent, and Expedia, up nearly 50
percent, representing three of the top four gainers.            
        
    Also showing well were auto-related retailers such as
O'Reilly Automotive Inc, up more than 30 percent,
Advanced Auto Parts and Autozone, up nearly 20
percent each, which have been helped by near-record strength in
auto sales. 
    "Cars are on the road more, people are driving more because
gas is cheap, and there is more wear and tear," said Stephen
Massocca, chief investment officer at Wedbush Equity Management
LLC in San Francisco. 
    Kim Forrest, senior equity research analyst, Fort Pitt
Capital Group in Pittsburgh, likes Urban Outfitters,
despite its 20 percent share price drop this year, because it
has had success selling high-end clothes.

 (Editing by Linda Stern and Bernadette Baum)

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