Epiphany Investing

Searching Out the Optimal Portfolio of “Revelation” Stocks

With Circuit City the Poster Child, Consumer Retail is Full of Land Mines

Posted on | November 3, 2008 Time: 7:02 pm |

Today’s news that Circuit City would close 155 stores and re-negotiate leases on 566 others certainly isn’t shocking - the company has been an awful operator for several years and is one Hail Mary away from insolvency. That said, we shouldn’t ignore the potential harbinger of weakness across anything related to discretionary consumer spending.

I’m frankly amazed that consumer discretionary stocks have held up as well as they have; names like Macy’s (M) and Bed Bath & Beyond (BBBY) have rallied off their lows, and trade for market multiples or higher. But if we look beyond the bullet points of the 3rd quarter GDP report, we see that consumer spending fell 3.1%, the worst showing since 1980. And that data points back to before the crisis really unfolded in October. In the last month, negative wealth effects have permeated all classes of investors and consumers, creating a mentality towards hoarding money over spending it.

Consequences for Portfolio Allocations

As such, I’m petrified of investing in any company generating disproportionate profits from products and services that can be put off or avoided. Over the next six months, this will happen, most threateningly amongst high-net-worth individuals, many of whom have recently become “reasonable-net-worth”.

Aside from graphics chip maker NVIDIA (whose products end up in computers, video game hardware, and cell phones) and glass guru Corning (GLW) the Secular Trends Portfolio is not exposed to discretionary income. I would advise strong avoidance of consumer tech, retailing, hotel operators (Marriot, Starwood, Wyndham), and other leisure names until we have some sense of where GDP will bottom out.

Regardless of who wins tomorrow’s election, the chances of some form of tax stimulus in the coming months is high. But no matter how much money can be mustered up by the government, it will be a drop in the pan compared to the level of housing equity-related stimulus that consumers were pumping into the economy between 2003 and 2007. We had one $250 billion plus tax package in the summer, and we can see how that played out in terms of spending.

Ryan Barnes

disclosure: author does not hold positions in the companies mentioned.

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Category: Economic Indicators, Fundamental Analysis, Retail, Secular Trends Portfolio
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