Holiday sales probably will grow at a slower rate this year than last. That may present an opportunity for investors prepared to wager they’ll be better.
Most investors aren’t betting on a strong shopping season in the U.S. because of unemployment that’s remained above 8 percent since February 2009 and ambiguity about future tax rates, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago, part of the BMO Financial Group which oversees about $60 billion of assets. Even so, now is the time to consider a trucking-stocks strategy because these conditions may offer a favorable risk-reward, he said.
“Everyone associates retail stocks with the holiday season, but trucking companies may be a smarter play for a positive surprise from the consumer,” Ablin said. Truckers are “an interesting” opportunity because their shares have trailed the market since 2009, reflecting pessimism about the economy; meanwhile, retailers have enjoyed an “enormous rally” -- a sign more optimism has been priced into these stocks, he said.
Retail sales, excluding restaurants, vehicles and gasoline, rose 0.9 percent last month from June, the biggest gain since January, based on data from the Census Bureau. Robert Dye, chief economist at Comerica Inc. in Dallas, estimates they may increase an inflation-adjusted 2 percent to 3 percent in November and December, the traditional holiday rush, compared with 2.7 percent last year.
“It’s not doom and gloom, but it’s not a robust forecast, either,” Dye said, adding that holiday sales rose as much as 4.7 percent on an inflation-adjusted basis in 2005.
Weak consumer confidence is hurting discretionary spending and probably will continue through the rest of this year because of anemic job growth and the looming fiscal cliff, he said. The U.S. faces higher taxes and reductions in spending on defense and other government programs that will take effect at year-end unless Congress acts.
The Bloomberg U.S. Asset-Heavy Trucking Index -- with 14 companies including Knight Transportation Inc. and Werner Enterprises Inc. -- has lagged behind the Russell 2000 Index by about 51 percent since Dec. 31, 2008. In the same period, the Standard & Poor’s Retail Select Industry Index has led the broader S&P 500 by 146 percent.
Trucking stocks continue to trail the Russell 2000 and now are at the same “key support level” as a year ago, in part because earnings for several companies -- including Werner and Con-way Inc. -- were weaker than investors anticipated, said Jim Stellakis, founder and director of research at New York-based research company Technical Alpha Inc.
Although investors may be wary about identifying this level as a bottom, trucking stocks last year outperformed the Russell 2000 by 10.6 percent between mid-September and Dec. 30, when their relative performance was previously this low, he said.
Based on the depth of the current underperformance, investors appear to be bracing for “very anemic volume growth,” said Art Hatfield, an analyst in Memphis, Tennessee, with Raymond James & Associates. “Nobody’s pricing in anything positive in terms of a pick-up in economic activity in the near-term.”
The rally in the retail index has stalled after it broke an uptrend that began in February 2011, indicating investor sentiment has become a little bearish in recent months, said Stellakis, a chartered market technician. “Retail stocks may be a group investors are looking to underweight now.”
Gross domestic product grew at a 1.5 percent annual rate in the second quarter, after expanding 2 percent in the period ended March 31. The jobless rate rose to 8.3 percent in July, the 42nd consecutive month above 8 percent; and consumer sentiment, measured by the Bloomberg Comfort Index, fell to minus 44.4 in the week ended Aug. 12, the lowest since January.
One bright spot: The U.S. added 163,000 jobs in July, the most since February, after four consecutive months when gains trailed the median estimate of economists surveyed by Bloomberg.
Amid continued weakness in “big-picture drivers” of spending, investors are “a little squeamish” about what to expect from this year’s holiday-sales season, said John Manley, chief equity strategist for Wells Fargo Funds Management in New York. Still, it “wouldn’t be unusual” for consumers to figure out a way to splurge, even if it means skimping on other purchases, he said, adding that if shoppers can exceed what will probably be “fairly conservative” sales estimates, trucking companies may benefit.
“Betting against the American consumer is a tough bet to make,” he said.
The same things holding back shoppers may inhibit trucking stocks from overcoming the years of underperformance, Hatfield said. Even if Americans deliver on a strong holiday season, a rally in this group may be short-lived until the U.S. economy exhibits sustained signs of improvement and expands at a faster pace, he said.
For now, companies that transport items including retail goods have indicated activity remains stable, Hatfield said, adding that even though volumes and the prices truckers charge their customers are weak by historic standards, there’s no indication another recession is imminent.
Kevin Knight, chairman and chief executive officer of Phoenix-based Knight Transportation, sees reason for “some optimism” that the second half of this year will “end up being more seasonal,” he said on a July 25 conference call. “Compared to my expectations, I would say that June has been a little bit behind what I would have hoped for and that July has been a little bit ahead.”
Volume for Con-way ended June “on a strong note” after it was a “little light” early in the month, President and Chief Executive Officer Douglas Stotlar said on an Aug. 1 conference call. The Ann Arbor, Michigan-based company also saw daily tonnage strengthen in July to finish “slightly ahead” of last year, he said.
Based on conversations with customers, “we continue to see people pretty optimistic about their business, even with really, really slow economic growth,” Greg Lehmkuhl, president of Con-way’s freight division, said on the same call.
While freight volume of companies including retailers and consumer packaged-goods makers -- a barometer of the broader economy -- fell 0.7 percent in July from the prior month, it exceeded the trailing 10-year average of minus 2.5 percent for July’s sequential change in shipments, based on data compiled by Bloomberg from Cass Information Systems.
Forecasting holiday sales this year still is more difficult than in the past, Dye said. In addition to all the economic impediments, Americans also are saving more -- 4.4 percent of their disposable personal income in June, the highest in a year -- which could hurt spending if people are worried about jobs and taxes, he said.
Nonetheless, consumers have to be “hit over the head pretty hard” to cut back meaningfully on gift-giving, Wells Fargo’s Manley said.
“When expectations are modest, Americans rarely disappoint when it comes to holiday sales,” he said.