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
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