3 Reasons to Eye Consumer Goods
Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In May, the Bureau of Economic Analysis published its Personal Income and Outlays Report. According to its report, consumer spending increased 0.1% from the previous month. Albeit small, the increase solidifies the notion that the consumer goods sector is hot right now.
For companies related to consumer goods, such as Target (NYSE: TGT)(NYSE: TGT)(NYSE: TGT) and Polaris Industries (NYSE: PII)(NYSE: PII)(NYSE: PII), the uptick in consumer spending is a wonderful sign. The rise also benefits credit service companies like American Express (NYSE: AXP)(NYSE: AXP)(NYSE: AXP), because more spending means that more consumers will purchase via credit card.
And of course it never hurts that the growing number of online sales are almost exclusively through credit card. Also, with a swipe fee of 2.7%, 1.35% higher than competitors, American Express pulls in more revenue per swipe. Of course there’s more good news to add to the consumer spending story – here’s what you need to know.
The most recent consumer spending data published by Gallup shows that spending remained mildly positive in April. Upper-income Americans spent an average of $140 per day while lower-income Americans spent an average of $72 per day. Naturally, the affluent spend more, especially on recreation.
Polaris has long been the provider of recreational vehicles for the wealthy. During the past 10 years, Polaris returned 1,000% more than the S&P 500. The company’s popularity even attracted the government as a customer. The D.O.D. now allows Polaris to compete for defense contracts, which will help the company achieve its goal of one day earning $200 million in revenue from its defense business.
Thomson Reuters reported that consumer sentiment was at a six-year high in the first quarter of 2013. And Bankrate’s Financial Security Index shows that American’s have remained financially confident.
The more confidence consumers possess, the more they’re likely to whip out their wallets and swipe their cards. Take for instance American Express. Driven by confident consumers, and a “swipe fee” that is twice as high as Visa and MasterCard, the company’s share price has climbed 30% in 2013. Although a great long-term investment, I’m eyeing support around $68 before considering going long.
Personal consumption expenditure (consumer spending) is vital to economic growth. In the U.S., consumer spending equals about 71% of GDP, roughly $11 trillion. As such a large (and growing) percentage of the United States’ gross domestic product, it’s no wonder why this sector is so profitable.
S&P’s Capital IQ, which recently chose Target as its stock of the week, stated that despite near-term headwinds related to higher taxes, delayed tax refunds, and difficult weather, it expects consumer spending to accelerate this year and again in 2014. The expected acceleration couldn’t have come at a better time for Target. Target recently raised its quarterly dividend to $0.43, an increase of about 9%, and I expect Target to climb higher after its second quarter consumption data is released.
For yet another way to profit from consumer goods, consider an ETF. According to US News, the best fund in the consumer goods sector is the Vanguard Consumer Staples Index Fund ETF (NYSEMKT: VDC)(NYSEMKT: VDC)(NYSEMKT: VDC). Starting the year near $90, the stock now sell for around $103.
Further, in the past 10 years it returned 60% more than the S&P 500. Its expense rate is 90% lower than the average expense ratio of funds with similar holdings and its low fee rate of 0.14% is another great reason this ETF was chosen the best in its class.
You propel America forward
Remember that without your monetary contributions, the U.S. economy would stall. Whether you’re buying durable goods (a tie for dad), non-durable goods (the gas you purchased on your way to the mall to buy a tie for dad), or a service (getting the tie dry-cleaned), you are the reason the consumer goods sector is on fire.
And regardless of which income class you’re in, look to your own spending habits for a glimpse of the near future. Of course, adjust investment strategies accordingly, but remember that consumer goods are hot right now, and based on the data, should stay that way.
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Marie Palumbo has no position in any stocks mentioned. The Motley Fool recommends American Express and Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!