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Be Careful of Consumer Stocks

Many consumer stocks have rallied to 52 week highs  (when the Dow was at 13,000 and the S&P around 1300).  Many have doubled and tripled while the S&P recently peaked to around 950, up 40% from its March low.

Consumer stocks historically lead a recovery and stock market rally. However, many are way ahead of the indexes and imply a return to 15-20% growth, as indicated by their 15-20 P/E ratios. Furthermore, many of these consumer stocks pay no dividend.

True retail sales (ex gasoline) of restaurants, apparel, travel, etc are down 4 months in a row. The consumer is constrained by job losses and mortgage woes. I do not believe the American shopper will return to his/ her past free spending ways as many of the consumer stocks indicate he will.

As an example, J Crew (JCG) has more than tripled from it $8 low to $27, near its 52 week high. Sporting a near 40 P/E, trading at 18 times cash flow and 6.6 times book value, this consumer stock is priced to perfection.

JCG is a consumer stock with a thin 3% profit margin (60% less than the typical S&P company). The current  price  implies the US retail sector will more than rebound to its former 2008 level when JCG’s operating earnings and net earnings were 80% higher.

Fred Crossman, J.D, C.P.A.

Joshua Barone, Managing Partner Ancora West Advisors

 

The mention of companies in this article should not be considered as an offer to sell or a solicitation to purchase any securities of the companies mentioned.  Please consult an Ancora West Investment Professional on how the purchase or sale of securities can be implemented to meet your particular investment objectives goals. Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778

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