It Appears That Consumer Discretionary Spending Continues

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It seems out of character that an investment strategy based on consumer discretionary spending in today’s economy is not be a viable strategy. Going against this train of thought is the Consumer Discretionary SPDR (NYSEMKT: XLY). This exchange-traded fund, which started on Dec. 16, 1998, has posted a one-year return of 23.4%, a three-year return of 17.9%, and a five-year return of 12.7%. This performance can be used in financial planning by projecting hypothetical returns to meet long-term asset accumulation goals. Of course, subject to market conditions and no guarantees implied.

The Consumer Discretionary SPDR fund contains 84 stocks. Below are two charts: an allocation chart and a price chart for the past year. What is interesting is that the top stocks by weighting are in the entertainment/media sector. This seems to defy logic when the news is constantly filled with consumer pessimism.

The top weighted position as of May 2 is Walt Disney (NYSE: DIS)). The holding in this ETF is 6.8%. The year-end reports show growth in the media and parks and resorts groups of Disney. Media grew by 7% over the same quarter the prior year, while the parks and resorts group also increased by 7%. Second-quarter 2013 earnings increased by 32% from the same quarter last year. The price chart below shows significant price gains in the past six months. In my opinion, Disney is a stock that has been through some rough times, and now corporate management may have cleaned house to the point where the under-performing units will no longer cause a drag the performance.

The second position of the Consumer Discretionary Select Sector SPDR Fund belongs to Comcast Corp (NASDAQ: CMCSA). Comcast’s two main businesses are global media and technology. I like Comcast. The price chart below contains a few upside surprises, and the first quarter of 2013 earnings per share increased 13.3%, excluding gains from sale of assets. Comcast continues to capture market share in cable and Internet-connectivity services. This stock appears to have a solid foundation for future growth.

Next in line of top holdings of the Consumer Discretionary Select Sector SPDR Fund is Home Depot (NYSE: HD). Home Depot is considered a cyclical company. Now that new home sales are improving considerably and existing homes need repairs and/or remodeling, Home Depot has a reputation as the best retail supplier, and its financial performance will rise along with this perceived increased demand.

Look at the price chart below. The uptrend is clear and with a one-year return of 45.4%, it appears continuance is well in place. Fourth-quarter 2012 earnings rose by 21.5% from the last quarter of 2011. The quarterly dividend was increased by 34%. First-quarter earnings will be released later in this month. I like the fundamental drivers of Home Depot, and think this is both a good company and a good stock.

Following up in the fourth slot of the Consumer Discretionary Select Sector SPDR Fund is McDonald’s (NYSE: MCD). McDonald’s does not offer a compelling reason to buy this stock. The price chart below shows recent short-term positive action, yet it may be just a return to where it was about a year ago.

First quarter results of 2013 are not impressive either. Global sales decreased by 1%, diluted earnings per share are up 2%, and $1.1 billion was returned to shareholders from share repurchases and dividends. McDonald's is undergoing a total upgrade of all of its stores. The new stores look more functional. The capital investment in the stores, regardless if they're corporate owned or franchised, will place a short-term burden on cash flows and profits. In the long term such upgrades will extend the life of the stores significantly.  

One of the benefits of an exchange traded-fund such as the Consumer Discretionary Select Sector SPDR Fund is the diversification. It is not necessary to like all the holdings. This strategy appears to hold up well in recent times and may make a great foundation piece of a long-term portfolio. Picking and choosing individual stocks from this index should be done with care.

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Jeff Stouffer has no position in any stocks mentioned. The Motley Fool recommends Home Depot, McDonald's, and Walt Disney. The Motley Fool owns shares of McDonald's and Walt Disney. 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!

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