While there have been some rough patches along the way, it has generally been a banner year for stocks. The U.S. market indexes all have experienced sharp increases through the first 11 months of 2013.
With the holiday shopping season fast approaching, many investors are looking to ride an uptick in retail spending to achieve even more gains that will further pad their portfolios heading into 2014. Unfortunately, that may not be as easy as people think.
In fact, anyone expecting the market run up to continue or perhaps those eyeing a late, year-end play on equities should consider the following facts:
• Macro trends do not favor strong retail sales: Though the equity markets have taken off and corporate profits are rising, the economy overall continues to struggle to gain a solid footing, plagued by tepid GDP growth, an uneven labor market and stagnant wages. Combined, these factors point to less discretionary income and more consumers scaling back their spending this upcoming holiday season.
• Quirky calendar: Thanksgiving falls on November 28, leaving six fewer shopping days between Thanksgiving and Christmas versus last year. Also, any boost Hanukkah would provide will likely be muted, since it begins November 27, much earlier than normal. Retailers have stated they will ramp up pre-holiday marketing in an effort to get shoppers in the stores sooner this year, but Americans are ingrained to begin their Christmas shopping after Thanksgiving and it remains to be seen whether such efforts will be successful.
• Political brinksmanship: After enduring a government shut down and a near debt default, Americans are perhaps more distrustful than ever of their political leaders. Congress’ approval rating is 9%, according to a recent Time magazine poll, and while the president’s numbers are much better, they are as low as they have ever been. Many are wary of the upcoming budget negotiations, which must produce a deal by January 15 to avert another shutdown. Lingering doubts could tamp down spending, as consumers fret about the unknown.
All is not lost for the savvy investor seeking bright spots in what will likely be an overall mediocre holiday sales environment. The key is to focus on companies that are able to continue to command a premium among retail shoppers for their products; offer some family friendly (especially kid friendly) entertainment; and appeal to a mass audience with the appearance of luxury exclusivity. In today’s environment, companies with these attributes will be the big winners.
With this in mind, the following are examples that could be a few of the lone bright spots in what otherwise will be a subdued holiday shopping season:
• Apple – With a world-wide market share of more than 30%, Samsung continues to reign supreme over the smartphone universe. But Apple remains very competitive and has boldly projected that it will sell more than 55 million iPhones in the fourth quarter, nearly twice what it sold in the third quarter. Admittedly, Apple does not have any ‘new’ products on the shelves for the holidays, but it does have a refreshed line of iPads, iPhones and computers, and such products will be in demand as consumers look to either upgrade old devices for themselves or give gifts to friends and family. Apple still has the best products around and many ‘must have’ devices.
• GameStop – Though video game sales are down from last year, GameStop is up nearly 125% year to date. The company stands to build on that growth in the fourth quarter, as most gamers have been holding off making purchases in anticipation of the release of the Xbox One and Playstation 4. Add to that a slew of new releases by top-selling video game franchises, including Call of Duty and GTA. It’s reasonable to expect that these new product lines will drive a large increase in revenue and profit for video game retailers such as GameStop.
• Michael Kors Holdings– Michael Kors has had a great year so far, rising more than 60%, and it’s poised to build on that momentum during the holiday season. The company is perfectly situated to cater to a growing and vibrant mass affluent market, producing a line stylish clothes, watches and accessories (which have enormous margins) that give the illusion of luxury but at a price that’s fair – especially when compared to higher-end retailers like Louis Vuitton and Gucci. Kors has many of the ‘in’ products this year and will have a good holiday season.
• Walt Disney– Families are flocking to the movies this year, and Disney has been one of the main beneficiaries, raking in more than $3.8 billion in worldwide receipts. Look for the trend to continue. Thor, which was released November 8, has already amassed nearly $500 million globally, and other Disney films such as Frozen and Saving Mr. Banks are still due to come out before Christmas. Plus, its theme parks and cruise lines are huge attractions for families during the holidays. We expect a very robust travel season and Disney has a great value proposition for parents.
• Starbucks – Everyone has close friends and family to shop for during the holidays. But to be frank, everyone also has a couple people on their list for which a gift card is more than enough. From an investor standpoint, Starbucks fills this role perfectly. And while it was recently ordered to pay Kraft a nearly $3 billion settlement stemming from a long-running dispute between the two companies, the markets absorbed the news fairly well, and the company continues to be well positioned for success. Along with much lower coffee bean prices, Starbuck’s margins continue to improve.
Although we don’t think the Holiday season will be as robust as we would like, it should be a decent year. However, it will not be easy pickings in the stock market as there will be clear winners and losers this holiday season. It is more important than ever to carefully select securities that will perform in this slow growth environment. A slow holiday season does not signal the end of our bull market, but it will force investors to be a little extra cautious heading into the New Year.
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki (www.gerberkawasaki.com), an independent investment advisory and wealth management firm with approximately $200 million in assets under advisement. Gerber Kawasaki clients and employees may own positions in various companies mentioned in the article. Readers should not construe this article as a research report and should not buy anything without doing their own research.