By Sam Stovall Here we are, about two months away from Memorial Day weekend, the unofficial start of the summer holiday season. And that got me thinking about leisure stocks. I'm fully aware of the value investor's old saying "buy straw hats in winter, and overcoats in summer."
But if you've read this column, you know I like to focus on stocks' momentum. So I pulled up the chart below on the Standard & Poor's leisure products subindustry index, and the price action looked constructive to me.
As a reminder, the jagged blue line represents the subindex' rolling 52-week price performance as compared with the 52-week performance for the S&P 1500 index (which combines the S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes). Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the subindex 14-year mean relative strength.
S&P equity analyst Gary McDaniel follows this subindustry, consisting of 13 companies in industries that make toys and sporting goods. During 2004, the subindex advanced 13.9%, compared to a 10% gain for the S&P 1500. Year-to-date through Mar. 31, the subindex has risen 2.5%, vs. a 2.4% decline for the S&P 1500 Index.
But in the wake of the recent strength, a nagging question remains: Is it too late to invest in leisure stocks? Well, that depends. McDaniel's overall investment outlook for the leisure-products group is neutral, although his opinion varies on individual stocks.
JAZZED UP BRANDS. McDaniel thinks toy companies that are focused on reinvigorating core brands and developing innovative line extensions to help older toys keep their appeal are likely to achieve top-line growth. He also expects growth from educational toys and toys integrating electronic capabilities.
However, S&P sees continued pricing pressures, as discounters such as Wal-Mart (WMT) likely capture an increasing share of the retail market. McDaniel expects toy manufacturers to seek out less-traditional retail channels to support volume growth and higher margins over the longer term.
With S&P's expectations for continued economic growth, McDaniel sees improved demand for certain leisure activities, including golfing and boating, and a corresponding lift in equipment sales. However, he believes fierce price competition will hurt the profit margins of golf-equipment manufacturers. S&P also anticipates little downside protection in the event of bad weather during the prime golfing months, which can dampen equipment sales.
GROWTH DRIVERS. While McDaniel views the longer-term outlook for leisure stocks as generally favorable, he expects to see wide variances among the companies. During the next decade, as the population bubble of aging baby boomers continues to expand, S&P believes the outlook for segments such as boating and golf (which tend to be favored by middle-aged and older Americans) should improve.
Meanwhile, pursuits involving more vigorous physical activity, such as skiing and tennis, may see a corresponding decline. Due to factors such as new products, marketing effectiveness, and acquisitions, the pace of sales and profit growth for some leisure-time companies could significantly diverge from that of the industry as a whole. McDaniel believes the factors driving long-term leisure spending include demographics, income levels and growth, consumer confidence, and the amount of free time available.
What about the individual names in the group? Only Brunswick (BC
; recent price, $47), with a 4 STARS (buy) ranking, carries a favorable investment opinion from S&P. On the flip side, Callaway Golf (ELY
; $13) and Polaris Industries (PII
; $69), both ranked 2 STARS (sell), are viewed unfavorably. The remaining companies, such as Hasbro (HAS
; $20) and SCP Pool (POOL
; $32), are designated either 3 STARS (hold) or NR (no ranking).
So there you have it. Maybe this time the value investors are right, and fundamental and momentum investors should be selective when investing in this group.
Industry Momentum List Update
For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), their proxies (the highest STARS-ranked companies in the subindustry index -- tie goes to the largest market value) as of Apr. 1, 2005.
S&P STARS Rank
Fertilizers & Agricultural Chemicals
Integrated Oil & Gas
Managed Health Care
Oil & Gas Drilling
Oil & Gas E&P
Oil & Gas Refg., Mktg. & Trans.
5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.
As of December 31, 2004, SPIAS and their U.S. research analysts have recommended 26.5% of issuers with buy recommendations, 61.3% with hold recommendations and 12.2% with sell recommendations.
All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
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This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS.
This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.
This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Stovall is chief investment strategist for Standard & Poor's