February 21, 2018 06:46 pm CST
This is Weird
By Briton Ryle, Wealth Daily

2015 was going to be the year the American consumer started spending again. The list of reasons the purse strings were gonna finally fly open was as long as your arm.

Gasoline prices were falling, savings were up, more people were getting jobs, there was a wealth effect from better home values and higher stock prices, and the economy was stabilizing — all these things meant the average American should be in the best financial shape in years.

And what else do you do when you're flush but go out and spend some loot?

savings rate

Institutional investors plowed money into the S&P 500 Select Consumer Discretionary ETF (NYSE: IXY) during the fourth of quarter of 2014 and again this year, starting in February. Clearly they were betting on better spending numbers.

And that ETF has performed very well. It's up a total of 19% since October 2014 and up 5.5% just this year.


Both gains handily beat the S&P 500's performance over both time frames. You don't have to read between too many lines to come to the conclusion that Americans must be spending more money. Otherwise, why would a consumer discretionary ETF be doing so well? 

One strategist guy told Bloomberg, "The American consumer is impossible to push down for a long time, and investors are putting up money now for future returns.''

I'll admit, I too thought spending was going to pick up. It was one of my big themes for 2015. In addition to the conditions listed above, it just felt like we were far enough past the financial crisis that people would relax a little.

Is the Consumer Really Back?

The funny thing is, retail numbers have stunk lately. Christmas shopping wasn't particularly good. First-quarter retail numbers were also nothing to write home about. 

And if we look at some specific instances, it's just awful. Teen retailer Abercrombie & Fitch (NYSE: ANF) is just one example. In two years, the stock has fallen from $50 to $22. I can't remember the last time this company had an optimistic earnings report.

Other teen retailers aren't doing well, either. Aeropostale (NYSE: ARO) has dropped from $14 to under $2 in two years. Zumiez (NASDAQ: ZUMZ) has gone from $40 to $23 in six months. 

So maybe the millennial crowd doesn't like the traditional retailers. Who can figure out teens and twenty-somethings anyway, right? There are always luxury retailers. People with tons of cash never have any qualms about buying quality goods...

Well, Michael Kors (NYSE: KORS) stock has dropped from $100 to $42 in a year. At Coach (NYSE: COH), it's $60 to $35 in two years.

If you want to, you can certainly make the case that Americans simply aren't spending money. But that's not exactly true.

Big box retailers are doing okay. Both Macy's (NYSE: M) and Target (NYSE: TGT) are up around ~10% year-to-date, and Macy's has only missed earnings estimates in two of the last four quarters...

So let's go back to that Select Retail ETF and once again ask the question: Why has it done so well?

A Retail ETF By Any Other Name...

The individual investor — that's you and me — has to pay attention to the details. Because in today's headline-driven society, if you don't dig a little, you're going to miss something. And if you do dig, if you do the extra work to get to the heart of a matter, you'll be ahead of many other investors.

It would be easy enough to see that the S&P 500 Select Consumer Discretionary ETF has outperformed the S&P 500 by a wide margin and conclude that you should buy Wal-Mart (NYSE: WMT) or Target stock. You'd have done okay — but not because you were mirroring the performance of the S&P 500 Select Consumer Discretionary ETF. That ETF has nothing to do with Target or Wal-Mart...

The top holding of the S&P 500 Select Consumer Discretionary ETF is Disney (NYSE: DIS). The second-biggest holding is Amazon.com (NASDAQ: AMZN), and then it's Comcast (NASDAQ: CMCSA). That's probably not what you'd expect when you see a Consumer Discretionary ETF.

To round out the top 10 holdings, add Home Depot (NYSE: HD), McDonald's (NYSE: MCD), Starbucks (NASDAQ: SBUX), Nike (NYSE: NKE), Time Warner (NYSE: TWX), Lowe's (NYSE: LOW), and Twenty-First Century Fox (NASDAQ: FOX).

That's two cable companies, two media companies, the biggest online retailer that also has a huge website-hosting business, two home improvement stores, and two restaurants. Nike is about the only traditional retailer in the bunch, and even then, that's a stretch.

I'll admit, I was surprised by this fund's holdings because I don't normally think of Disney and Comcast as consumer discretionary stocks. Maybe that's why they added the word "select" to the fund's name...

I'd probably put Comcast and Time Warner in the tech sector. Or even the media sector, but whatever. There's no denying we spend our loot on cable for both TV content and Internet access. And I suppose at the end of the day, you could even call Apple a retailer if you wanted to...

Apple's become the biggest and most profitable company in history by revolutionizing the consumer electronics market (emphasis on consumer).

It might even be frustrating to you to find out a consumer discretionary ETF isn't really about retail. But remember, the whole point of the fund is to perform well. Names be damned, if you can get some quasi-retailers in there and have the fund go up, you do it...

And besides that, we can certainly learn a thing or two about what to do with our money from this ETF...

What We're Spending On

Yeah, people are spending money — plenty of it. We're buying cell phones, tablets, cars, and going out to eat.

The most recent auto sales numbers were the best in years. And with new electric vehicles and the aluminum-bodied F-150s now hitting the market, there are some truly new automotive products out there that we haven't seen in years.

And Starbucks... well, that's an easy one. Americans are spending more than ever on dining out. The latest statistics show that we are spending as much on going out to dinner as we are on eating in. You know I'm no fan of McDonald's (how that stock remains near a 52-week high when sales are falling is beyond me), but I've had Starbucks in The Wealth Advisory portfolio since $22.85 (split-adjusted), and we've got 120% gains. 

Even with restaurants, where we know spending is strong, you have to be discerning. On the good side, names like Chipotle (NYSE: CMG), Buffalo Wild Wings (NASDAQ: BWLD), and Red Robin (NASDAQ: RRGB) have done pretty well, while others like El Polo Loco (NASDAQ: LOCO), Noodles & Co. (NASDAQ: NDLS), and Potbelly (NASDAQ: PBPB) have been disasters.

Of course, you know about Shake Shack (NYSE: SHAK) by now...

There are still a few undiscovered restaurant stocks out there. I've got one in The Wealth Advisory right now that is going to increase the number of locations it currently has by a factor of 10. It is executing well, and it just crushed its most recent quarterly earnings.

I'm more bullish on this stock than any other Wealth Advisory stock, and I'll be sharing more about it with you in the future...

As for "traditional" retail, I think it is what it is. If you're expecting people to run and buy a bunch more clothes, it's not going to happen. I still like the J.C. Penney (NYSE: JCP) trade, but that's a turnaround story. Otherwise, it's probably time to move on from retail.

Until next time,

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Briton Ryle

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