Consumer Stocks Poised to Rise as Economy Improves

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A multitude of positive news on the economic activity front has led to a strong rally in consumer stocks.

First off, fewer than expected Americans filed applications for unemployment benefits last week, indicating that companies are cutting fewer workers and may be willing to hire more. 

Unemployment benefit claims fell 22,000 last week, according to data released by the Labor Department. This is no flash in the pan as the four-week moving average –thought to be a better indicator than a single week's data– also dropped by 6,750 to 355,000. In fact, the drop is part of a longer declining trend which has seen jobless claims falling almost 11 percent since November. After adding 157,000 jobs in January, the job market is looking much better than three months ago.

After taking several hits in recent months due to the fiscal cliff issues, debt ceiling crisis, and expiration of the payroll tax cut, U.S. consumer confidence also edged up in February.  According to data released by the Conference Board, the U.S. Consumer Confidence Index increased 11.2 points in February to 69.6, marking the first increase since October.

The rally in consumer confidence was broad-based, with almost every major subindex increasing. Some more positivity flowed in the market after the Commerce Department’s revised figures revealed that the economy expanded, although marginally, in the fourth quarter. Even though the growth at 0.1 percent was not very high, it was a reversal from initial reports of a contraction. 

While these upbeat performances are likely to have a positive impact on the entire economy, consumer stocks are the ones which stand to gain the most and quickly.

Consumer stocks such as Diamond Foods (NASDAQ: DMND), Dean Foods (NYSE: DF), and Clorox (NYSE: CLX) have already started moving up, taking cues from what is happening to general economy.

San Francisco-based branded packaged food company Diamond Foods is one such stock which has been moving up lately. Up nearly 6 percent in the last month, Diamond Foods’ undervalued position attracted investment firm BlackRock which disclosed recently that it picked up a 7.85 percent stake in the company.

With a market capitalization of just $336.57 million and stung by improper accounting practices in the past, the company does not quite make it to institutional buyers’ lists. However, the latest development seem to have vaulted the stock in a new orbit altogether.

Similarly, value has emerged in Dallas based Dean Foods which lost in double digits a couple of weeks back after giving a below-expectation profit forecast for the next quarter. Dean Food’s report card for the latest quarter was pretty good, with the company swinging to a profit of $37 million against a loss of $9.9 million in the same period last year.

Revenues also jumped nearly 4 percent to $3.04 billion in the fourth quarter of 2012. After dropping considerably after issuing poor guidance, shares of the dairy products company are on a comeback trial. The company (and possibly the stock) will be a natural beneficiary of the US economy gaining traction.

Meanwhile, Clorox which makes household consumer products, continues to dazzle the markets with its stellar performance. In what can be described as an upward slanting trendline, the stock has gained 8 percent over the last month.

It is also one of the few consistent performers and just repeated the feat with an 8.5 percent growth in quarterly revenues to $1.32 billion and a 17 percent jump in net income to $123 million in the latest quarter. Being one of the largest players in its operating segment will likely help the company in extracting the best from the improving economic picture.

Overall, the next few months could very well be net positive for consumer stocks even as the federal spending cuts may bring about some weaking in the wider economic recovery. The fact that these businesses are largely driven by the underlying strength and are lagging indicators of any economy’s wellbeing is likely to fuel the rally in the coming quarters. If the economy takes a hit in coming quarters, it could take some time before the impact is felt by the companies or their shareholders. 

valuewalk has no position in any stocks mentioned. The Motley Fool owns shares of Dean Foods Company. 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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