Finding Growth in the Consumer Sector

 | Sep 07, 2012 | 11:00 AM EDT
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The consumer discretionary ETF that most often comes to mind is the SPDR Consumer Discretionary ETF (XLY). Many of the advisers I speak with use this fund to gain exposure to that sector.

Year to date, the XLY is up 19%, outpacing the benchmark index. The ETF is also outperforming the S&P 500 consumer discretionary sector, which was showing a year-to-date gain of 16.34%. The divergence is largely due to some differences in weightings in top holdings. For example, the S&P consumer discretionary index has McDonald's (MCD) as the top holding, and Comcast (CMCSA) is in the No. 2 spot. That order is reversed within the XLY fund.

A top holding within each is Amazon (AMZN). While some analysts continue to lump this company with tech, I've long considered it more representative of consumer strength. On Thursday, the stock was trading higher, along with the general market. CEO Jeff Bezos was hosting an event in California on Thursday afternoon, showing a new Kindle Fire tablet and a new model of the basic e-reader. The stock rallied to an all-time high of $252.27 intraday but pulled back somewhat ahead of the news conference.

Of course, the XLY is not the only ETF that will give you exposure to consumer discretionary stocks. One of the best movers in terms of individual stocks on my small-cap and mid-cap screens is the luxury retailer Michael Kors (KORS). This stock is a component of the Dow Jones U.S. Consumer Goods Sector Index Fund (IYK), albeit a small holding at only 0.14% of the fund.

Let's look at the IYK first. The ETF is up 9.64% so far this year. Unlike the XLY, this fund is also viewed as a vehicle to gain exposure to consumer staples. The top three holdings are Procter & Gamble (PG), Coca-Cola (KO) (soda and energy drinks are classified as "staples") and Philip Morris International (PM).

Interestingly, both the XLY and IYK include homebuilders. It may be a bit surprising to see those included as consumer names. After all, builders don't make products to eat, drink, smoke, wear, watch or play with. However, on another level, it makes sense. Who buys homes? Consumers.

But back to Michael Kors: Though the company is headquartered in Hong Kong, it's included in the U.S.-focused IYK because of its exposure to North America. The company is only beginning to launch a large-scale global expansion.

Kors went public in December at $20. It's now trading near $55.23. The stock rallied to an all-time high of $55.57 intraday Thursday and was resting just below that level, closing at $55.50.

This is one of those stocks that lands squarely in my growth screens. With earnings growth in the triple or double digits since July of last year, and revenue growing at double-digit rates for even longer, the fundamental track record is solid.

Not only has the company proven itself, but Wall Street sees more growth ahead. Earnings are expected to increase at rates of 60% and 26% in the next two fiscal years.

So what's the upshot? While there's plenty of debate in the media about strength or weakness of various subsectors of consumer discretionary -- for example, whether luxury names are performing better than discounters -- there are definitely ways to get exposure to consumer stocks in a way that adds up in the "gains" column.

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