Typically, these big numbers from the government don't mean much to me. But occasionally you get one that blows you away and this morning's gross domestic product number, showing a 5% gain for the quarter, is one of these numbers. It's helping to define today's trading, in which the industrials are doing well but so are all of the stocks of companies that are benefitting from the decline in raw costs.
Let me define what appears to be the perfect stock for this moment, Kimberly-Clark (KMB). I know this company's hardly an industrial. But it is a big branded company and when I see the gross domestic product flying like this, I wonder if the consumer isn't trading up to Kleenex and Huggies. It used to happen when things got better. Maybe it is happening again.
In the meantime, the company's become much more focused, having shed its Halyard Health (HYH) division, making it a pure consumer products play in a moment when the pure consumer products companies are supposed to do well, according to all of the histories of when oil goes down in price.
It's got a 2.85% yield, which is much higher than the 10-year Treasury. That makes it a bond equivalent when rates are going down. It doesn't want to be in any price wars that kill its gross margins, which is why it pulled Huggies from Central and Western Europe, ceding the diaper market to Procter & Gamble (PG).
Most important? When you buy disposable diapers, you are buying a ton of plastic. That means you are buying a ton of oil-based products. Kimberly Clark is not cutting the price of those diapers to you. That means its gross margins can go higher. Plus it takes a tremendous amount of energy to make paper towels and Kleenex: more lower cost energy wins for KMB.
Now, you can say you want something more cyclical more levered to the growth of the economy. I get that.
So how about retail?
When in doubt, always circle back to winners. That means you want to own Costco (COST). I know, tiresome, tiresome, to keep buying the same winners all over again. But the last thing you want is earnings risk. We know that Costco just reported good earnings, so we don't have some holiday downer of a story.
Restoration Hardware (RH) is the same way. You just got that fabulous quarter. We know that the consumer, particularly the rich consumer, is spending. Restoration Hardware had amazing numbers. It's a buy.
So is Walgreen's (WAG). Sure, it's up. But this was the first good quarter, for heaven's sake. And it's going international. That allows you to craft a terrific story. Same with Starbucks (SBUX), another that just reported an amazing number and can be bought.
Or you want a delayed play for the "wow it was a gift card Christmas;" remember we like Blackhawk (HAWKB) because it owns that market and has many more products in store for you.
How about some restaurants? Again, when you are playing a trend based on lower gasoline prices, don't over-think it. We like Jack in the Box (JACK), because of its Qdobe kicker, we like Popeye's Louisiana Kitchen (PLKI) because of that amazing quarter and Cracker Barrel because it's on the interstate. And we just did the work on Denny's, said it was cheap. It's a natural.
Now, let's get down and dirty. When you have a 5% gross domestic product increase, that means you are going to have a return to non-residential construction: heating, ventilation, air conditioning; so that means Honeywell (HON) and the lagging United Technologies (UTX). It means that there's going to be more travel so you can buy Disney (DIS), Marriott (MAR) and Wyndham (WYN). And of course you can buy Boeing (BA) and American Airlines (AAL) and Spirit (SPR), my faves in the group as the airlines will be flush and they will buy new planes with the additional money. These all work when you have a gross domestic product number this strong and you have the Fed giving you a window of opportunity, because it just spoke a week ago.
Ah hah, but what doesn't work. We have had a remarkable run in health care, a relentless run that encompassed everything from cost containment to biotech to hospitals and regular drug companies.
We don't have a lot of money coming in, so these stocks act as sources of funds, meaning there is selling, money raising, giving fuel for the buying of the heavier industrials and the big energy users.
Plus you have a catalyst. The owners of the biotechs and the drug companies are petrified with the meaning of what Express Scripts (ESRX) did to Gilead (GILD) the other day, when it chose to favor AbbVie (ABBV) for its new Hepatitis C drug, even as it has a more difficult, two-a-day regimen and some would say inferior characteristics when it comes to success rate -- although that's hotly disputed by both Abbvie and Express Scripts. No matter, there's competition where there wasn't and there's a rotation into companies that do better when the economy does better, and that's certainly not health care.
How long can this last? Until the Fed decides that it must take action and raise rates because the economy's really hot. Sure, it could do an emergency meeting. However, I think that's unlikely, as the 5% gross domestic product hasn't yet translated into more business formation and higher earnings. But this is the impact of lower gasoline speaking, and it isn't done going down.
So the rotation stays in earnest. And, at least for the next two weeks, it must be heeded.