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Investment Line: The consumer is back
by James Phillipps on May 05, 2010 at 13:28
Concerns that indebted consumers could prove a drag on the economic recovery look ill-founded with the Americans continuing to spend, spend, spend.
US consumer spending increased as expected in March for the sixth month running, confirming a robust return to consumer spending in the first quarter. Consumer spending accounts for over two thirds of US economic activity.
With more than three quarters of the first quarter earnings season now passed, the steady growth of consumer spending is being reflected in strong earnings per share growth for retailers.
The Trade Radar blog shows that the retail sector has far and away outperformed the in the wider market, of which only 13% of the 5,800 stocks have delivered positive EPS growth.
Some 46% of department and specialty retail stores have delivered EPS growth with 44% of consumer electronics chains, 40% of clothes shops, 36% of specialty foods stores and 33% of computer software and peripherals shops all in the black.
Investment legends George Soros and Warren Buffet raised some eyebrows when they piled into retail late last year. But is there still value to be had in the sector over on this side of the pond?
Standard Life’s head of UK equities David Cumming certainly thinks so. He has been buying into the dips to bulk up on the sector in his UK Equity Recovery fund.
‘During February, we added to Kesa Electricals, following share price weakness, and HMV, where management believe earnings will grow, due to new initiatives,’ he says. He has been a big champion of DSG International and Debenhams in recent times, which are examples of the number of turnaround stories that appear so rife in the sector.
He also points to car and bicycle accessories store chain Halfords. He says: ‘Its core business is trading well, boosted by cycling’s increasing popularity and a move towards consumers repairing their old cars rather than buying new ones,’ he says. ‘The company is considering further acquisitions in this area, having already bought car servicing and repairs business Nationwide Autocentres, and is another domestically oriented stock that offers good overall value.’
He is not only manager upbeat about the opportunities in the sector. Paul Marriage’s biggest holding in his Cazenove UK Smaller Companies fund is the food and drug retailer, Booker Group, while Bill Mott, manager of the PSigma Income fund, is a strong backer of Tesco, which he views as one of the blue chip leaders that will lead the way in what he believes will be a return to a ‘Nifty Fifty-style’ market.
One thing is for certain, it takes a brave man to bet against the Anglo-Saxon mentality of spend, spend, spend.
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- Kesa Electricals PLC (KESA)
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