Consumers Poised for Strong Recovery

In the midst of all the global turmoil, the U.S. consumer is finally starting to show a broad-based recovery. However, this continues to be a three steps forward and one step back recovery as seen by Tuesday's unexpected retail sales drop. Job growth has been steadily humming along at north of 200,000 jobs per month, with wage growth just now coming back to life. Housing and credit growth are moving back to more normal levels but are still below long-term trends. Consumer confidence is at a six-year high. And while the markets are fearful of global volatility, the trends have been to the benefit of the U.S. consumer with oil prices at multiyear lows of $52 per barrel and the U.S. dollar at multiyear highs against most of its major trading partners. Low oil prices and a strong dollar are a potent cocktail for rising discretionary purchases. While these are all powerful trends, indicators and economic drivers, up until now this has not translated into a widespread pickup in consumer spending. In fact, in the first half of the year, to our surprise, consumers were taking a very significant part of the gasoline savings to pay down debt and strengthen their balance sheets. It looks like that is starting to change, but it will not be a straight line up. Tuesday's retail sales number is another reminder of the bumps along the way. The consumer has been quite muted in recent years as job losses, wealth destruction and deleveraging transpired. As these trends have reversed, we believe the consumer is in the process of reawakening and about to return to previous spending patterns. There can be a lot of upside to the numbers once this occurs. After lagging the stock market last year, consumer discretionary stocks have started to take note of this and are up 10% through Monday's close. We believe this consumer trend is in the early stages and there is much more room for these stocks to move higher. While the stocks are off their lows, in many cases the valuations are still very reasonable. This is especially the case if sales and earnings return to historic trends. Some of the key areas that we believe will be beneficiaries are the durable and more discretionary aspects of a consumer's lifestyles, such as clothes shopping, home purchases, vacations and automotive purchases. The consumers have underspent on these areas in recent years, and as they get more confident with their jobs and family finances, they are likely to resume their past profligate ways. Here is a list of durable consumer stocks that we would recommend investors look at: Price 2015 P/E 2016 P/E Kohl's (KSS) $64.24 14.2 12.8 Macy's (M) $66.80 14.3 12.9 Target (TGT) $83.39 18.1 16.5 D.R. Horton (DHI) $28.25 15 12.8 Lennar (LEN) $53.58 16.5 14.1 Toll Brothers (TOL) $39.16 18.6 14.7 Harley-Davidson (HOG) $57.55 14.5 12.9 Host Hotel (HST) $20.87 13.5 FFO* 12.1 FFO* Royal Caribbean (RCL) $83.53 18.3 14.4 Whirlpool (WHR) $176.15 14.3 11.6 AutoNation (AN) $65.20 15.9 14.2 BorgWarner (BWA) $54.57 16.9 14.1 General Motors (GM) $31.92 7.2 6.2 Johnson Controls (JCI) $49.22 14.4 12.5 * Funds from operations Price 2015 P/E 2016 P/E Kohl's (KSS) $64.24 14.2 12.8 Macy's (M) $66.80 14.3 12.9 Target (TGT) $83.39 18.1 16.5 D.R. Horton (DHI) $28.25 15 12.8 Lennar (LEN) $53.58 16.5 14.1 Toll Brothers (TOL) $39.16 18.6 14.7 Harley-Davidson (HOG) $57.55 14.5 12.9 Host Hotel (HST) $20.87 13.5 FFO* 12.1 FFO* Royal Caribbean (RCL) $83.53 18.3 14.4 Whirlpool (WHR) $176.15 14.3 11.6 AutoNation (AN) $65.20 15.9 14.2 BorgWarner (BWA) $54.57 16.9 14.1 General Motors (GM) $31.92 7.2 6.2 Johnson Controls (JCI) $49.22 14.4 12.5 * Funds from operations

Consumers Poised for Strong Recovery

Which means consumer stocks should be along for the ride.

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