The consumer is alive and well and spending. The consumer wants value. The consumer wants reliability. And the consumer will pay for it.
That's the lesson of this market and that's the lesson of the ICR, the best consumer conference there is. Whether it be retailers like Kohl's (KSS) or Children's Place (PLCE) , restaurants like Darden (DRI) , parent of Olive Garden, or Canada Goose (GOOS) , you can make a case to buy any of the stocks of the companies down here because they are simply doing so well that it feels like you can almost throw darts at the stocks of consumer companies and you can win.
Why is this? I think that the answer is the key to much of the consumer side of the wins that investors are getting.
I say consumer side because the big gains in the market reside in the capital goods companies that are enjoying the fruits of the synchronized global expansion. We have been behind the stock of Boeing (BA) for 240 points now but we aren't backing away. We think this $318, up another 8 today, can go to $400 rather easily. We understand that Caterpillar (CAT) , a huge beneficiary of a change in accounting for new purchases of capital goods, has a stock that hasn't fully discounted the good news yet. We get that United Technologies (UTX) , Honeywell (HON) , Emerson (EMR) , Cummins (CMI) , they are all doing much better than we thought possible simply because demand has improved. When you sell elevators, and heating ventilation and air conditioning systems, as well as jet engines, you will be a winner right now because businesses are firing on all cylinders.
However, down here at the ICR, it's a totally different story and let me boil it down so everyone understands it. After my myriad interviews I come up with six props to why these stocks are doing so well.
First, there is a spirit among the purveyors of anything retail that the cutthroat race to the bottom for so many companies is over. We don't hear that Christmas was promotional anymore, code for having to discount items to get rid of them. If anything this was the first full-priced Christmas since before the Great Recession. As much as I would like to praise the operators for getting it right, it's almost as if they have to go out of their way NOT to get it right after this change in consumer mindset.
Which brings me to the second point. I don't like to be touchy or feely but let's face it, the consumer feels better post the election of President Trump. Now I can say that you can't flick a switch when someone is elected and attribute the good times to one person. In fact, I am sure Democrats could argue that Trump got a great hand. That said, there is no doubt that he has augmented the hand and it's paying off. I think that businesses don't fear expanding as much as they did before because they regard the regulatory landscape as both constant and benign. Just so we are clear, I think the banks will say the same thing when they start reporting this Friday.
Third, all of the companies I have talked to, and I mean all of them, still have a ton of money left over even after they have expanded. That's because almost every one of these companies was a high federal tax payer. They all made their budgets for buybacks and dividends based on much lower numbers, they simply didn't expect this much cash coming in. That cash is allowing for everything from great retention bonuses for their best workers to more money to expand, and yes, to buy back stock which is no sin. I think that buying back stock has been demonized. The companies I am talking to want to reward workers, customers and shareholders.
Fourth, employment matters. Wages matter. I feared that health care costs would eat into how much consumer could spend. However, it looks like the confidence that comes from plentiful jobs is inspiring a lot more spending than what people are actually paid. Now there are about 100 companies that have offered bonuses to workers. I bet it is 1,000 companies when we are done.
Fifth, e-commerce. We have finally gotten to the point where other companies have caught up with Amazon.com (AMZN) when it comes to the digitization of their businesses and the need to have an e-commerce strategy that works and doesn't break the bank. We know that so many of these companies were caught unawares by the positive consumer service aspect of Amazon as well as its incredible knowledge of what the consumer wants via artificial intelligence and the convenience that Amazon offers.
They got wise. They are using their stores as positives to make it easier to return and pick up. As much as it sounds ridiculous, BOPUS is working, meaning Buy on line and pick up in store, is something the consumer wants. Plus these companies are now using sophisticated programs like those from Salesforce.com (CRM) to anticipate what their customers want. They are competing on a more level playing field than they have against the Death Star since Amazon became the biggest retail disrupter of all time. The restaurants have figured out how to get the consumer to come back and that, plus good training and take out and delivery, have allowed for them to catch some of the dollars that the millennials want to spend if there is a positive experience out there.
Sixth, and final, there is a sense among all of these companies that the consumer will recognize value when they see it. When Canada Goose sells coats that go for $800 to $900 bucks, the consumer says "this is a great investment" because the quality is so good it represents value. When Denny's (DENN) offers a menu that gives you $2, $4, $6 and $8 offerings, it recognizes that value is what's wanted. When Kohl's gives you brand names for less and its private label for even less than that, the value resonates and the customers become loyal. When Children's Place gives you the highest quality children's clothes at a reasonable price, it doesn't matter if they are mall based. The customer will be there, with an open wallet spending.
Now when the market moves as big as this one, when the beast is rampaging, you get more than the machinery and industrial companies and the consumer based companies flying.
After a prolonged period in the wilderness, the drug and biotech stocks are finally having a renaissance. I look back at the hapless downgrade by JP Morgan of Johnson & Johnson (JNJ) , something I called out as regrettable the moment the ink was dry back on January 2nd, and I say this research got you to sell the stock at $140. It's now at $144 and I think it's on its next leg up. The life sciences companies like Illumina (ILMN) , Danaher (DHR) and Thermo Fisher (TMO) are roaring after some positive presentations.
I also see the rails, beneficiaries of the new tax code roaring again. Rarely have I ever seen one group be re-valued up so quickly based on, well, nothing that's happening at the companies that we can see. I respect that the oil related equities aren't going to quit with oil at $62 and surging higher. I know that the banks like the higher interest rates that so many are fretting about.
But the bottom line from the ICR? Don't get in front of the consumer freight train. It's coming full speed ahead and it's better to get on the locomotive than get run over by one.
