The Friday Wrap

 | Jul 18, 2014 | 7:21 PM EDT  | Comments
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Say what you will about the last week, but to us, much of the data points released only reinforced our views on several companies and their shares.

For a while now, one of your author's had noted the growing problem with water, not just its availability, but severe problems with the domestic water infrastructure. Over the last several weeks, I'm sure you've read not only about the wild fires in California, but also about the near-drought conditions in the state. In case you have not read about this, about 80% of the state is experiencing "exceptional" drought, according to state authorities, in what is being called the third-most-severe dry spell in California since record keeping began a century ago.

West coast water regulations. This week California regulators reportedly approved the state's first mandatory water restrictions for its urban residents. In situations like this we tend to see surcharges and the like from water utilities that more than offset lower water usage and, as you know, price increases tend to more or less drop to the bottom line. While it may tax consumers' wallets, it's a positive for American Water Works (AWK), the largest publicly traded utility that is also shaping up to look like a dividend dynamo company.

More price increases on the way. The May CPI was hotter than expected, as was the June PPI reading. Even commentary in the Fed's July Beige Book report released on Friday indicated prices are heating up. More specifically, higher prices were noted for meat, dairy and construction materials and six Fed districts reported that those higher prices were being passed along. Ahead of next week's June CPI data, the Hershey (HSY) announced its first price increase in three years to combat higher commodity costs, with cocoa being the most impactful on the candy maker's margins.

Hershey follows several other food companies, like Kraft Foods (KRFT), that announced similar increases over the last several weeks. As we delve deeper into quarterly earnings, we would not be surprised to hear more such companies, like Nestle (NSRGY), Mondelez International (MDLZ) and Tootsie Roll (TR) make similar announcements.

Another weak retail sales report. Also this week, we received yet another weaker-than-expected retail sales report, this time for June. Despite the better-than-expected June employment report, at least with the headline figure, and motor vehicle sales for the same month exceeded 17 million SAAR for the first time since July 2006, you have to think something is up when it comes to why the consumer is not spending.

We've also heard commentary from Family Dollar (FDO), the Container Store (TCS), Rent-A-Car and even Wal-Mart (WMT) that consumer traffic has been slower than expected.

While you may think it's all going online, not all the online players are faring as well as some others. Sales by retailers on eBay (EBAY) grew 12% in June, well below the 34% climb for the month delivered by Amazon (AMZN), according to researcher ChannelAdvisor. That share loss is likely one of the reasons why eBay delivered a weaker-than-expected third-quarter forecast at $4.3-4.4 billion vs. the expected analyst average of $4.42 billion. Yes, Amazon seems to be eating a lot of other company lunches, but conversations with cyber security and other companies suggest it is also gaining traction with its Amazon Web Services platform. We continue to favor Amazon shares as we move into the back half of the year.

June restaurant traffic falls and so do shares. Both same-store sales as well as restaurant traffic fell in June according to data from MillerPulse. Traffic fell 1.7% in June, marking the 19th consecutive month of negative comparisons. But digging into the report, we find even more signs of a cautious consumer given weak dinner and weekend business with consumers ordering fewer alcoholic drinks and soft beverages. We've already witnessed weak domestic restaurant sales for Yum! Brands (YUM), newly public Zoe's Kitchen (ZOES) missed expectations with shares falling 19% since July 1, and renewed weakness has hit Potbelly (PBPB) shares. Not a good omen for companies like Chipotle Mexican Grill (CMG), Domino's Pizza (DPZ), McDonald's (MCD), BJ's Restaurants (BJRI), Famous Dave's (DAVE) and several others.

Rail traffic continues to climb. One of the highlights of the Fed's Beige Book was that all 12 districts reported stronger manufacturing activity over the last few months. We've seen confirming data in the form of strong weekly rail traffic and intermodal loadings according to data from the American Association of Rail Roads. Complementing the weekly data, recent earnings commentary The Greenbrier Companies (GBX) point to favorable rail car demand, particularly for tank cars. From the rail company perspective, CSX (CSX) shared its outlook for a "positive demand environment" for the September quarter and "much more robust" rail volume. CSX also boosted its rail car capital spending, which should be positive not only for Greenbrier shares, but also those for Trinity Industries (TRN) and American Railcar (ARII).

Housing delivers another miss. There has been much speculation over the pending direction of the housing market, so much so that even your usually hive-minded authors have had a difference of opinion. At least for the near term, it seems that we have our answer given another housing starts miss, this time for June. Housing starts data once again missed expectations with the June figure coming in at 893,000, far below the 1.02 million Wall Street was looking for. Building permits also tumbled in June, which suggests a more subdued housing market ahead. Yes, Versace has thrown in the towel and has backed away from the housing market at least until the fundamental data points to a better entry point for companies like Toll Brothers (TOL), D.R. Horton (DHI) and others. While Versace is often able to sway Hawkins, given enough enthusiasm for his position, this time she couldn't be moved given the sorry state of employment in the nation. Housing is on her worry list until she sees solid gains in quality jobs, improvement in the percent of the population successfully in the labor market and real gains in household income levels.

That's a wrap for this week, but be sure to check back Sunday night for The Week Ahead. Enjoy your weekend while Hawkins does her best to not visibly gloat!

Columnist Conversations

I've read recently quite a few comments about how Chinese stocks are cheap and investors should jump in. ...
Just some resistance to be aware of. Not saying it will cap the market, just that it is there for a decision....
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