Tag Archives: consumer

5 Consumer Discretionary Funds To Buy On A Spending Splurge

Consumer spending levels increased at the fastest pace in eight months this January. Not only consumers bought big-ticket items like cars and houses, but they also ramped up purchases of a range of goods that include other discretionary products. Rise in wages, decline in the jobless rate, cheap gasoline price and winter thaw helped spending levels to move north. Given the loosening of purse strings, investing in funds from the consumer discretionary sector may prove to be profitable as a major part of consumer expenditures go to this sector. What is more encouraging, income levels rose in January for the 10th straight month. This shows that consumers are in a position to spend more in the coming months. Consumer Expenditure Climbs in January The Commerce Department on Feb. 26 reported that personal spending increased 0.5% in January. The rise exceeded the consensus estimate of a rise by 0.3%. Moreover, a price index of consumer spending level went up in January. The personal consumption expenditures (PCE) index in the 12 months through January advanced 1.3%, the highest increase since Oct. 20 14. The core-PCE index that excludes food and energy prices also rose 1.7% in the 12 months through January, the largest increase since July 20 14. Telltale Signs of Consumption Pickup Retail sales are off to a good start this year, indicating strength in consumer spending. The Commerce Department said on Friday that sales at retail stores rose 0.2% in January. Consumers mostly bought big-ticket items while online store sales also moved north. The so-called core retail sales figure that excludes automobiles, gasoline, building materials and food services also increased 0.6% in January following a decline of 0.3% in December. Car sales too spiked in January. At a seasonally-adjusted annualized rate (“SAAR”), car sales increased to 17.55 million units in Jan. 20 16 from 17.32 million units in Dec. 20 15, the highest SAAR for any January since 2006. Moreover, existing home sales for January hit the highest level since last July. Existing home sales increased 0.4% in January to a seasonally-adjusted annual pace of 5.47 million. Rise in Wages, Low Fuel Price Boost Spending Higher wages and steady hiring helped consumers to step up their purchases in January. Average hourly wage growth increased to 2.5% in January compared with year-ago levels. Wages grew in January at the best pace in about six years. Wage growth picked up momentum after remaining almost flat for several years following the recession. Moreover, the U.S. unemployment rate was 4.9% in January, the lowest since Feb. 2008. Many analysts believe that it is close to “full employment”. Cheap gasoline is also powering Americans’ ability to lift spending levels. Until recently, gasoline prices had hit a 12-year low across the Midwest. The Federal government had lowered its national average gasoline price forecast for this year by 5 cents to $ 1.98 a gallon. Separately, a return to normal winter temperatures also boosted spending. 5 Consumer Discretionary Funds to Buy Banking on these encouraging trends witnessed in January, it is expected that consumer spending levels will improve further in the coming months. Additionally, households’ purchase on a range of goods not only increased in January, but also their incomes rose too. According to the Commerce Department, personal income gained 0.5%, more than the consensus estimate of a 0.4% increase. More income generally translates into more expenditure. Moreover, U.S. consumer sentiment has already started showing signs of recovery in February. The Thomson Reuters/University of Michigan’s final consumer sentiment reading for this month came in at 9 1.7, which was higher than the preliminary reading of 90.7. Given the healthy pattern of consumer spending, it will be wise to invest in funds linked to the consumer discretionary or cyclical sector. More money in consumers’ pocket will eventually increase spending on discretionary items. The consumer discretionary sector includes companies that sell nonessential goods and services. This sector includes companies involved in retail, automobiles, media, consumer services, consumer durables and leisure products. Here we have selected five such consumer discretionary or cyclical funds that boast a Zacks Mutual Fund Rank # 1 (Strong Buy) or #2 (Buy), have positive three-year and five-year annualized returns, have minimum initial investment within $5,000 and carry a low expense ratio. Fidelity Select Consumer Discretionary Portfolio No Load (MUTF: FSCPX ) seeks growth of capital. This fund invests a large portion of its assets in securities of companies involved in the manufacture and distribution of consumer discretionary products and services. FSCPX’s three-year and five-year annualized returns are 14.3% and 12.9%, respectively. Annual expense ratio of 0.79% is lower than the category average of 1.4 1%. FSCPX has a Zacks Mutual Fund Rank # 1. Putnam Global Consumer Fund A (MUTF: PGCOX ) seeks growth of capital. This non-diversified fund not only invests a major portion of its assets in companies in the consumer staples space, but also invests in discretionary products and services industries. PGCOX’s three-year and five-year annualized returns are 10.6% and 9.3%, respectively. Annual expense ratio of 1.26% is lower than the category average of 1.43%. This fund has a Zacks Mutual Fund Rank # 1. Fidelity Select Retailing Portfolio No Load (MUTF: FSRPX ) invests the major portion of its assets in securities of firms involved in merchandising finished goods and services to consumers. FSRPX’s three-year and five-year annualized returns are 20. 1% and 18.4%, respectively. Annual expense ratio of 0.8 1% is lower than the category average of 1.4 1%. This fund has a Zacks Mutual Fund Rank #2. Fidelity Select Automotive Portfolio No Load (MUTF: FSAVX ) seeks capital appreciation. The fund invests a large portion of its assets in companies involved in the manufacture or sale of automobiles, trucks, specialty vehicles, parts, tires and related services. FSAVX’s three-year and five-year annualized returns are 7.9% and 2.7%, respectively. Annual expense ratio of 0.85% is lower than the category average of 1.4 1%. This fund has a Zacks Mutual Fund Rank #2. Fidelity Select Multimedia Portfolio No Load (MUTF: FBMPX ) seeks capital appreciation. The fund invests a major portion of its assets in companies engaged in the production, sale and distribution of goods or services used in the broadcast and media industries. FBMPX’s three-year and five-year annualized returns are 1 1.2% and 12.4%, respectively. Annual expense ratio of 0.8 1% is lower than the category average of 1.4 1%. This fund has a Zacks Mutual Fund Rank #2. Original post

Lessons From Muddy Waters Research And Other Short-Sellers In Avoiding Potential Value Traps

I recently read this book “The Most Dangerous Trade: How Short Sellers Uncover Fraud, Keep Markets Honest, and Make and Lose Billions” written by Richard Teitelbaum where he profiles 10 high-profile short-sellers including Bill Ackman, Jim Chanos and David Einhorn among others. In particular, the chapter on Carson Block of Muddy Waters Research caught my attention. Carson Block of Muddy Waters Research is best known for his firm’s short-seller reports on Chinese companies. Carson Block embarked on this journey as an activist short-seller with a visit to NYSE-listed Orient Paper (NYSEMKT: ONP ) in January 2010, at the request of his father William Block who operated an investment research firm called WAB Capital which was compensated by listed companies for publishing research reports. During the visit, Carson Block spotted a couple of red flags, including the inconsistency between the actual raw materials (20-foot pile of used paper which was used as feedstock) sighted and its accounting value on the company’s books, the condition of the fixed assets (“the rolling machinery was antiquated”), and the fact that management was apparently unable to answer questions relating to operational metrics during the meeting. He published a negative report on Orient Paper and distributed it via email in June 2010; the stock is currently trading at a fraction of its share price prior to the report. In the next few years, Carson Block started Muddy Waters Research and went on to publish more reports on companies such as Sino-Forest and Rino International. On Muddy Waters Research’s website, the firm highlights its track record , where it claims its nine “Strong Sell” Reports have led to four de-listings, four resignations of auditors/CFO/board members and more than six formal investigations by regulators into covered companies. Lessons From Muddy Waters In September 2014, Carson Block of Muddy Waters Research gave a presentation to accounting students at Baruch College, the presentation slides are available for download here . Carson Block highlighted a couple of red flags that investors should take note of: High Days Sales Outstanding Few tangible assets on balance sheet Highly acquisitive / high capex Outsized gross margins inconsistent with the value-add they are providing to customers Unique in reliance on intermediary counterparties Often (successfully) entering new businesses High revenue or expense concentrations with counterparties Unexplained cash in the Variable Interest Entity Business models that don’t make sense Opaque business model Tax preferences / rates that don’t hold up Obfuscating answers on conference calls Changing Key Performance Indicators Initiatives disappearing without mention Heavy insider selling Losing customers as evidenced by changing names of top 10 customers Significant customer and/or supplier is a related party Inventory turnover inconsistent with industry peers I will elaborate on some of these red flags in greater detail below with actual case studies. Highly acquisitive In 2011, it was reported that Olympus ( OTCPK:OCPNY ), a Japanese manufacturer of cameras and other electronics, utilized acquisition payments and associated fees to hide the fact that it had made severe losses on its investments. The writing was on the wall, for those who bothered to do due diligence, as the company was a serial acquirer buying companies at inflated valuations, only to write down some of these acquisitions in a short period of time. Furthermore, most of these acquired companies were in industries unrelated to Olympus’ core business and were loss-making. Outsized Gross Margins Longtop Financial, a software company with banks and other financial institutions in China as its clients, was the subject of a negative report by Citron Research in April 2011. One of the red flags highlighted by Citron Research was that Longtop reported outsized gross margins of 69% in FY2010, compared with gross margins between 15% and 50% for its peers. According to Citron Research, management’s explanation for the higher gross margin was that “they have more standardized software sales then peers and standardized software has very high gross margins of around 90%. The company claims that these solutions and modules can be deployed to new customers with fewer man-hours and expenses.” In May 2011, Longtop’s auditor resigned; and the company’s shares were suspended from trading in August 2011 by NYSE. Opaque Business Model Charlie Munger has this particular quote which I like a lot: Where you have complexity, by nature you can have fraud and mistakes. You’ll have more of that than in a company that shovels sand from a river and sells it. This will always be true of financial companies, including ones run by governments. If you want accurate numbers from financial companies, you’re in the wrong world. Certain industries and businesses are inherently more complex and opaque, making it difficult for investors and even auditors to understand and do decent work on them. It is telling that several vegetable farming/processing companies in China have been the target of short-sellers at any one point in time or another; see the reports published here and here . On e key risk factor with investing in companies operating in the Chinese agricultural industry is that both sales (to distributors) and purchases (from farmers) are usually transacted in cash without supporting documents such as receipts. Inventory turnover inconsistent with industry peers China Biotics, a manufacturer and distributor of probiotics products, reported inventory turnover ratios of 33 and 29 times in FY2009 and FY2010 respectively, while a March 2011 report published by China Economic Review mentioned that “During our visit to Shanghai Shining Biotechnology’s facility, we saw no evidence of inventory leaving the premises or clients coming for inquiries.” In June 2011, both the auditor and CFO of China Biotics resigned. Closing Thoughts I am a long-only investor and I do not engage in any short-selling. Munger’s quote below echoes my view: It would be one of the most irritating experiences in the world to do a lot of work to uncover a fraud and then watch it go from X to 3X and watch the crooks happily partying with your money while you’re meeting margin calls. Why would you want to go within hailing distance of that? Nevertheless, investing in value traps, particularly those that are or will be the target of short-sellers, is the single easiest way to lose money with stocks. Therefore, investors should actively learn from short-sellers and draw on their knowledge and experience to minimize the possibility of total capital impairment with any single one of their positions. As a special bonus for my subscribers, they will get access to a list of close to 100 Asian and U.S. stocks with large positive accruals (divergence between earnings and cash flow) and high Beneish M-Scores (these two are good indicators of fraud risks) in a separate bonus watchlist article. For readers interested in further exploring this topic, I have also previously written two articles on value traps, namely “How To Avoid Potential Value Traps With Net-Nets And Other Deep Value Stocks” and “Drawing Inspiration From Short-Sellers In Avoiding Potential Value Traps” published here and here respectively. Note: I flag potential value traps with corporate governance issues, financial statement manipulation risks and other red flags as part of my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service. My subscribers get access to the list of value traps for both deep value & wide moat stocks, in addition to monthly top ideas, potential investment candidate profiles and potential investment candidate watchlists. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.