Scalper1 News
Federal Reserve Chairwoman Janet Yellen sounded optimistic that the uptrend in retail and motor vehicle sales early in the second quarter may be indicative of improving consumer spending. In her testimony before Congress she said that consumer confidence is upbeat and consumer spending levels increased mostly in new cars and trucks. However, her statements come at a time when the June’s retail sales painted a dismal picture. June’s retail sales declined 0.3%. Sales excluding gasoline stations, auto-dealers and home improvement stores declined 0.1%. Reduction in consumer spending on cars, clothes, home furnishing and restaurants were cited to be the reasons behind this fall in retail sales. Retail sales figures in May were also trimmed from 1.2% to 1%. April’s figures were also revised lower. Signs of economic improvement, especially in the labor market have indicated that a rebound in consumer spending is in the offing. While this is true to a certain extent, the sector offers us a complex picture upon further examination. In fact, consumer staples and consumer discretionary may undergo declines in earnings according to our estimates. On the contrary, retail/wholesale may see an uptrend. This puts the spotlight on mutual funds focused on the retail sector. Before we look at favorably-ranked funds, let’s look at the current scenario. Troubles for Consumer Staples Despite improvement in the economic picture and job scenario coupled with lower fuel costs, many consumer staples companies are still struggling owing to a slowdown in international markets. This includes volatile equity markets and fears of a slowdown in China, sluggishness in Japan and an unfavorable economic environment in Europe. Weakening of many foreign currencies against the U.S. dollar, rapidly changing pricing policy, import controls in some emerging countries and political unrest in others is also hurting growth. In such a scenario, many companies in the consumer staples sector are resorting to tougher cost-control initiatives, accretive acquisitions and share buybacks. Some of these measures have met with success, but the sector as a whole faces several challenges. Is Consumer Discretionary a Good Bet? On first glance, consumer discretionary looks to be a good bet. There has been a slow but steady economic recovery since the second half of 2014, leading to better job prospects, improved business momentum and renewed optimism. Housing recovery, rising wages and cheaper fuel are the other positives. Companies operating in this space include fast-food restaurants, providers of entertainment products and services, makers of automobiles, textiles, apparels and luxury goods etc. These products and services will only be sought by consumers if they have sufficient disposable income. The latest decline in retail sales may indicate that consumers are being careful about where to spend money and to what extent. Some effects of the financial crisis seem to be lingering on especially when it comes to companies which deal in goods. The reason is that a strong dollar has made foreign products cheaper. According to the latest figures from the Department of Labor, prices of imported consumer goods excluding automobiles recorded the highest year-over-year decline in six years. This is bad news for retailers, though those companies from the sector offering services may be gaining from this trend. Retail Funds in Focus The upcoming earnings season has not painted a very optimistic picture as of now. Earnings for the S&P 500 components are projected to decline 6.7% year on year while revenues may drop 6%. Growth is projected to suffer across 9 out of 16 sectors. These 9 sectors may incur earnings decline. The Retail/Wholesale sector has a favorable trend. Earnings may improve 2.1% on 5.4% higher revenues. However, consumer staples and consumer discretionary are projected to see year-on-year earnings decline of 5.9% and 4.8% in the second quarter. Revenues for consumer staples may be up 0.7%, but declining by the same margin for consumer discretionary. The contradictions will keep investors on their toes. Looking at the buy-ranked mutual funds from the sector, Fidelity Select Automotive Portfolio (MUTF: FSAVX ) has average EPS growth rate of nearly 12%. FSAVX currently carries a Zacks Mutual Fund Rank #2 (Buy). The top holdings include major stocks from the automobile sector such as Toyota (NYSE: TM ), Ford (NYSE: F ), Tesla Motors (NASDAQ: TSLA ) and General Motors (NYSE: GM ). While General Motors has a negative Earnings ESP , the others have Earnings ESP of 0. Fidelity Select Retailing Portfolio (MUTF: FSRPX ) carries a Zacks Mutual Fund Rank #1 (Strong Buy) and the average EPS growth is 21.4%. FSRPX has strong year-to-date performance of 10.1% and the 3-year and 5-year annualized returns stand at 23.6% and 23.7%. Among the top holdings of the fund Amazon (NASDAQ: AMZN ), TJX Companies (NYSE: TJX ) and G-III Apparel (NASDAQ: GIII ) boast positive Earnings ESP of 33.3%, 5.3% and 5%. Another fund from the Fidelity family, Fidelity Select Consumer Discretionary Portfolio (MUTF: FSCPX ) that carries a Zacks Mutual Fund Rank #1 has an average EPS growth rate of 14.5%. This fund too has positive returns in all of the year-to-date, 1- year, and 3- and 5-year annualized periods. Among the top holdings, Walt Disney (NYSE: DIS ), Comcast Corp. (NASDAQ: CMCSA ) (NASDAQ: CMCSK ), L Brands (NYSE: LB ), and Amazon carry favorable Earnings ESP of 0.7%, 1.2%, 1.5% and 33.3%. All would want a promising second quarter earnings season. The earnings numbers will guide the retail sector investment instruments now and thus also put the spotlight on retail sector mutual funds. The medium to long-term prospects of the sector remains strong. Growth and consumer spending are expected to pick up over the rest of the year. This will lead to a recovery and even strong gains from these sectors generated by the consumer. Original Post Scalper1 News
Scalper1 News