INVESTORS NEED TO BE SELECTIVE IN BUYERS’ MARKET.
It’s no secret that the strengthening U.S. consumer base presents opportunities for investors, especially given the lacklustre global economy, but any future growth will depend on how long it continues to rally.
Kash Pashootan, portfolio manager at Ottawa-based First Avenue Advisory, a division of Raymond James, noted it is important to recognize that consu mers really come on later in economic recoveries — the current one being four or five years old — since they need the confidence to spend as well as the capacity to do so.
“Right now, both of those factors are online, whereas in previous years, the confidence came back but the consumer wasn’t as deleveraged as it is today,” Pashootan said, noting that debt as a percentage of income in the U.S. is the lowest it has been in several years.
As a result, he has been positioning the portfolios of the 190 or so families he manages money for (totalling about $225 million) to capitalize on what should be healthy returns in consumer-related stocks.
But since the easy money has already been made in U.S. stocks as a whole, as well as in the consumer space, investors need to be selective.
One area Pashootan likes is retail banking. Investors have been bullish on U.S. banks for years, but he pointed out that many of the larger players don’t derive as much of their revenue from retail banking as the Canadian banks do.
“If you’re out there buying a Goldman Sachs or Morgan Stanley, you’re really betting on the investment banking and M&A space, and not at all targeting the consumer space,” Pashootan said.
For those who want to target retail banking in large U.S. banks, he recommends Bank of America Corp. or Wells Fargo & Co. Of course, those names are vulnerable to weakness in regions that are slower to recover since they have exposure right across the country.
Pashootan prefers to cherry-pick
the regional banks, such as Columbia
Banking System Inc. (COLB/NASDAQ), which operates in Pacific Northwest cities such as Portland and Seattle. Those cities are two of the 10 fastestgrowing cities in the U.S. and experiencing meaningful increases in population and employment.
Those factors help support retail banks since people living in the region are more confident in extending the limit on their credit card, borrowing against their home to do a renovation, or acquiring a longer mortgage to buy a more expensive home.
Another area that should continue to benefit from a stronger U.S. consumer is the auto sector. Pashootan noted that companies such as Ford Motor Co. and General Motors Co. look attractive on a fundamental basis and remain relatively cheap, so they look like good buys if growth continues.
However, he’s taking a lower-risk approach by owning auto-parts manufacturer Magna International
Inc. (MG/TSX).
“If one of the automakers doesn’t do well, that demand is going to be absorbed somewhere else,” Pashootan said. “We’re hedged against that risk with Magna, which sells to Ford, GM and Chrysler among many more.”
Lower gasoline prices may also boost auto sales as consumers have more cash in their pockets, but many underestimate how long it takes for discretionary money to translate into greater spending. Pashootan believes this stage is beginning, saying that the consumer is “alive and ready.”
But increasing confidence in the U.S. is not all good news, as the U.S. dollar’s strength has begun to erode earnings of multinationals.
Pashootan considers Dr Pepper Snapple Group Inc. (DPS/NYSE) a good way to safeguard against a rising greenback, while getting some upside through growth in markets such as Mexico, which has the highest soda consumption per capita in the world.
Dr Pepper is coming off a great fourth quarter with more than 17% of its revenue from Latin America. It is also stealing market share from both Coca-Cola Co. and PepsiCo Inc. in emerging-market countries, but maintains stability because 88% of its revenues continue to come from the United States.