Go spend money, but not too much!
Do you remember, as I do, how politicians and economists were encouraging Americans to increase spending back in 2009 to help lift the country out of the depths of recession? It wasn’t that long ago that the rally cry was ‘go out and spend money’. The idea was that if Americans put the lock down on their wallets the recessions would be drawn out and more painful than if they kept the wheels of commerce turning.
Well, it seems as if this is yet another example of the American consumer bearing the weight of the economy on their shoulders – literally. Not to mention the reality that this mentality just meant kicking the ‘problem of the consumer driven economy’ can further down the road, a sure sign that there is a significant problem that nobody really wants to deal with. Today we received yet another reminder that this problem isn’t going away. But that doesn’t mean there isn’t a profit opportunity waiting in the wings for the astute small cap investor. I’ll get to that in a second.
***The reports out this morning state that consumer spending rose in March by the largest amount in the last five months. This spending helped to grow GDP by 3.2 percent between January and March – the third quarterly increase since last summer.
But the increase in consumer spending came at the expense of savings, which dipped to 2.7 percent in March from 3 percent in February. Economists such as Paul Dales from Capital Economics called the drop ‘disconcerting’ since the underlying reality is that Americans aren’t seeing their incomes rise. Higher spending, coupled with decreased savings, and a lack of income growth is not a recipe for a sustainable economic recovery.
***So what’s the deal? Americans are told to spend money to keep the economy afloat, but not to spend so much that they don’t accrue any savings. Despite being just poor advice, that’s an annoying message to receive, let alone to follow. I give Americans a lot more credit for being able to make wise decisions and cut through this garbage. And I think that the latest recession has made the average American more frugal than in the past.
If I’m right, I believe consumers will continue to spend money over the next year, but not so much that the saving rate will drop back to the 2007 low of 1.7%. The latest spending spree, for lack of a better term, was most likely consumers just pulling the relief valve a little bit, and enjoying themselves after a very tough couple of years.
So where is the profit opportunity you ask? It’s in consumer staples stocks. Many of these stocks are still attractively valued, and tend to do well when investors and consumers alike become increasingly conservative. Both are more than likely given the recent recession, and the massive run-up in stock prices since the March 2009 lows.
Defensive stocks like consumer staples may not be exciting, but they usually pay a dividend in addition to the possibility of generating capital gains. Names like Del Monte Foods (NYSE: DLM) are toward the higher end of the small cap spectrum with a market cap of $3 billion. But with a 1.3% dividend and a PE of only 12 this processed and packaged goods company is worth a look.
American Italian Pasta Company (Nasdaq: AIPC) is a smaller consumer goods company that sells dry pasta to the North American market. The company currently has a market cap of $837 million, trades with a PE of 10.4 and is projected to grow earnings 33% in the current quarter. It does not yet pay a dividend.
All three of these companies have pulled back recently. I’d add them to your watch list if you’re not watching them already. Not only do consumer goods stocks tend to be resilient when other stocks sell-off, they sell products that consumers, whether frugal or not, need to have. These three have products with solid brand reputation, and the stocks sell at a discount to larger peers like Kellogg (NYSE: K) which has a PE of 17.
