Discretionary Group May Hint At Outlook For 2016 Economy

By | February 23, 2016

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Cosmetics and personal care products are discretionary purchases. Granted, some people consider the products essential, and if you’re gripping the subway pole near the guy who decided to quit buying deodorant, maybe it no longer seems so discretionary. Yet, you only have to read the 10-K report for Estee Lauder ( EL ) to learn that personal care products and cosmetics are discretionary enough to take hits in economic downturns. One explanation is that people cut corners to save money during a recession. But Estee Lauder points out a more convoluted concern. “We generally extend credit to a retailer based on an evaluation of its financial condition, usually without requiring collateral,” the company 10-K reported. If the retailer is experiencing difficulties, the company may “curtail or eliminate business with that customer.” The Cosmetics-Personal Care industry group sometimes can signal trouble before its widespread. In November 2007, when stocks peaked just before the recession’s official start, the personal care group had already been declining since mid-2007. So, with all the talk of a potential U.S. recession in 2016, it’s only natural to ask how the personal care group is doing. The group is doing quite well — rising from No. 60 among 197 industry groups to No. 15, as of Tuesday’s IBD. Estee Lauder makes products covering skin care, makeup, fragrances and hair care. The company is expected to grow earnings 3% in fiscal 2016 ending in June. However, the Street expects earnings to grow 13% in fiscal 2017. Quality funds with positions in Estee Lauder include Fidelity Magellan Fund ( FMAGX ), which opened a position in Q4; Fidelity Balanced Fund ( FBALX ), which increased its stake 47% in Q4; and Fidelity Contrafund ( FCNTX ), which trimmed its position 0.5% in the fourth quarter. The stock is in the 5% buy zone after retaking an entry in soft trade. Prestige Brands ( PBH ) holds brands including Beano, Dramamine, Murine, Spic And Span and Anacin. The stock is building the right side of a base. In fiscal 2015 ended in March, Prestige Brands grew earnings 22% on a 20% pop in revenue. The Street expects EPS to grow 15% and 11% in fiscal 2016 and 2017, respectively. Funds have held a fairly steady exposure in Prestige. Wells Fargo Advantage Small Cap Value Fund ( SSMVX ) held almost 24,000 shares, as of Dec. 31. However, that represented a 49% reduction from the previous quarter. Natural Health Trends ( NHTC ) is a direct seller of personal care and wellness products. Earnings have leapt by triple-digit percentages in each of the past nine quarters. The stock has been a wild trader, dropping as much as 70% in its current consolidation. Image by Shutterstock Scalper1 News

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