The economic recovery, such as it is, has been driven mostly by the U.S.’s surprisingly vibrant manufacturing sector. With the housing and construction sectors in a deep funk, manufacturing has accounted for much of the recovery since 2009, although even that area of strength has waned during the last two months. The hope has been that the manufacturing sector would eventually reach a point where it would begin hiring in earnest, providing some aid to the still struggling consumer sector.
That point may be close at hand.
The unemployment picture, which is key to the recovery of the consumer sector, is still quote dismal. In fact, the official 9 percent unemployment rate may understate the true extent of the problem, according to Vadim Zlotnikov, chief market strategist at AllianceBernstein. If the labor market participation rate were as high as it was back in 2000, the unemployment rate would be closer to 13 percent, he believes.
Yet there are signs that the employment situation finally may get a bit better, as a cheaper dollar and a more expensive yuan encourage U.S. manufacturers to keep more jobs in the U.S., at least on a temporary basis.
“To gauge nearer term employment trends, we have been monitoring small business health and optimism, as small and mid-size businesses have been the key drivers of job creation historically. Here we see some encouraging signs, even though a full recovery is still nascent,” Zlotnikov wrote in a report to investors. He notes that loan growth, critical to the health of jobs-creating small businesses, has started to rebound.
That is one reason why he has a positive view of consumer stocks, where he rates a “neutral to overweight.”
The interest in consumer stocks began about two months ago as the economy slowed.
“During April, economic growth was not quite as robust as what was expected, and there was a shift to to defensive issues such as consumer staples,” says Daniel Peirce, vice president and portfolio manager of multi asset class solutions at State Street Global Advisors.
But data on the consumer has pointed higher more recently. The economy added 244,000 jobs in April, its biggest gain in 11 months. In early May, the Thomson Reuters/University of Michigan survey of consumers showed a reading of 72.4. That level, up from 69.8 in April, was above estimates.
As the economy picks up, a broader range of discretionary consumer companies could benefit.
Zlotnikov’s economic outlook--which includes modest payroll growth of 1.5 percent, jobs growth in manufacturing states, and a bottoming out in housing--favors several currently undervalued sectors, such as electronics, home retail and department stores. Later in the recovery, he expects appliance companies and publishing companies to gain, followed by casinos, hotel and travel companies.
He favors consumer cyclicals that have “attractive LBO characteristics” and pricing power. Among his top picks:
--Apollo Group (APOL, $40.97)--The Phoenix-based private education company with a market cap of has a market cap of $5.8 billion and a price to normalized earnings ratio of 5.2.
--Gamestop (GME, $27.88) The Grapevine, Texas-based specialty retailer has a market cap of $3.9 billion and a price to normalized earnings ratio of 7.3.
--URS Corp.--(URS, $43.95) The San Francisco-based engineering and construction company has a market cap of $3.5 billion and a price to normalized earnings ratio of 14.5.
--Career Education (CECO, $22) The education company based in Schaumberg, Illinois has a market cap of $1.7 billion and a price to normalized earnings ratio of 10.6
Given that the recovery has been under way since 2009, one would expect the opportunity for consumer cyclical stocks to have come and gone, according to Zlotnikov. But given the the weakness of the jobs market, that sector will benecit at a much slower pace than it has in previous economic recoveries.
