Rules of the Game: Use Discretion in Consumer Discretionary

 | Feb 21, 2013 | 9:00 AM EST
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A few years ago, I was having a conversation with the editor at a different financial website, and she asked what I considered a stupendously ridiculous question: "What is your favorite stock?"

I was momentarily shocked by the question, but when I regained my composure, I realized that this is exactly the way many long-term investors have been conditioned to think about their holdings. Exxon Mobil (XOM) gets treated like a family heirloom rather than a vehicle for investing against future liabilities. Apple (AAPL) -- until recently, anyway -- was treated as a magical treasure, something pre-destined to only go up, up, up.

Of course, this is the exact opposite approach of over-trading, something else that too many have gotten caught up in. (Oddly, the same people often maintain a buy-and-hold and "trade, trade, trade" mentality simultaneously.)

So where am I going with this? Just that I was noticing that my scans of large-cap leaders and top-performing recent IPOs hail from a variety of sectors (although medicals and financials are well represented at the moment). I was reflecting on the way that many investors mistakenly focus on a particular sector or industry as being "hot" or having potential, and throw too much money into one small area of the market.

Let's take a look at a relatively boring yet fairly solid sector: consumer discretionary. So far in February, the S&P large-cap sector is up 2.03%, behind only industrials, financials and consumer staples.

An outstanding earnings performer has been TJX (TJX), the parent company of T.J. Maxx, Marshalls and HomeGoods. The stock is not currently in the ranks of those that are outpacing the market in terms of price appreciation, but that's not necessarily a bad thing. Buying at or near new highs often means experiencing a pullback right after making your purchase. That type of movement understandably spooks many investors and traders, resulting in a sale -- at a loss -- that comes just before the stock rebounds again.

I'm not as much of a fan of "buy at highs" trading as I once was, partly because the inevitable pullbacks shake out too many traders prematurely. So a stock such as TJX, which is consolidating in a technically healthy manner below a prior high, becomes a viable buy-list or watch-list candidate.

The company reports fourth-quarter results on Feb. 27, before the bell. Analysts expect income of $0.81 per share on revenue of $7.65 billion. Those would mark year-over-year gains.

I started out this column by noting that I have no "favorites" when it comes to stocks or sectors (I still shake my head about that absurd question). With that caveat in mind, I have continued to see potential in the consumer discretionary sector. I know there are plenty of theses going around regarding the payroll tax increase, higher gas prices and other possible hurdles to increased consumer spending.

But I'm optimistic (if that is the right word) about the 30,000-foot thesis: Consumers in the U.S. and in other parts of the developed world love our stuff. We are accustomed to buying the latest and greatest gear. Some of it we'll pay up for, other stuff we expect to get at ever-lower prices. But we love to buy stuff.

There may be some blips along the way, and quarters that disappoint. And there are always companies and manufacturers that fail to execute properly or fail to respond to changing market conditions -- Best Buy (BBY), anyone?

While plenty of companies that can't keep up with the times are quick to blame "the economy" for their own shortcomings, others rise to the occasion.

In my next article, I will take a look at some more consumer discretionary large-caps that continue to show potential.

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