Consumer Stocks Maybe The Canary In The Coal Mine

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his client’s own shares of DIS & SBUX.)

Consumer discretionary stocks have come under pressure over the couple weeks since the end of July, using the Consumer Discretionary Sector SPDR (XLY) as a proxy for the group. The ETF has declined by over 4 percent between July 27 and August 18. That’s not a great sign, given the S&P 500 is down about 2 percent during the same period. But when we look at the top 5 holdings of the ETF, it is a bit more troubling

XLY data by YCharts

Disappointing Results

Shares of Amazon.com Inc. (AMZN), Starbucks Corp. (SBUX), Walt Disney Co. (DIS ), Priceline Group Inc. (PCLN) and Nike Inc. (NKE) have all fallen by over 5 percent, with each also underperforming the ETF and the S&P 500. Shares of Amazon have declined by over 8 percent, while Starbucks has fallen by 11 percent. Disney has plunged almost 8.5 percent, and Nike has dropped 5.5 percent. There is no doubt what is behind the falling stock prices: a round of disappointing earnings results and falling analyst estimates for this current quarter over the past 30 days.

The chart below shows the previous quarter and whether the company missed or beat estimates for EPS and revenue. Starbucks’ 11 percent stock decline was driven by the fact that it missed revenue estimates for the previous quarter. Analysts have also been aggressively cutting estimates for the company’s next quarter. Despite beating estimates in the last quarter, analysts have been slashing estimates for shares of Nike and Disney as well.

What About Amazon?

Amazon is the one exception in this chart. Despite its sharp earnings miss, it was still able to beat on revenue. The mixed results caused analysts to drastically lower their earnings estimates for the current quarter while increasing their revenue forecasts. For the most part, Amazon has always been a company that never focused much on the bottom line. Its historical focused on driving higher revenue and spending heavily are helping Amazon drive future revenue growth. (See: Amazon 2Q: Can It Produce Consistent Earnings?)

Barometer For Economy

The decline across most consumer names are deserved, with results that have been disappointing, while the expectations for the current quarter have been getting lower. Consumer names are of particular importance to pay attention to because the U.S. economy is heavily consumer-driven. These stocks could act as a barometer for the overall economy.

For now, we need to monitor the group closely. Another disappointing quarter could be enough to start getting investors across the market concerned.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer’s bio and his portfolio’s holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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