The first of the tax rebate checks were mailed in late April. David Wyss, S&P's chief economist, believes the U.S. economy will begin to benefit from the spending of these tax rebate checks. "We still expect the tax rebate checks to be spent quickly. Americans may say that they are going to save the money or use it to pay down debt, but even those who do pay down their credit card balances are likely to build them back up rapidly, in our opinion. Analysis of the 2001 tax rebate suggests households spent about 60% of the rebate within 90 days."
Where might consumers spend some of this newfound money? Based on recent industry index price performances, we think some investors believe the Computer & Electronics Retail subindustry will be a beneficiary.
The trailing 12-month relative strength for the S&P 1500 Computer & Electronics Retail subindustry index recently moved back above its 39-week moving average, and the moving average itself continues to trend upward, two favorable signals, in our opinion, for renewed market outperformance.
Year to date through May 1, the S&P Computer & Electronics Retail index fell 12.9% vs. a 3.7% decline for the S&P 1500. During 2007, this subindustry rose 14.9% compared to the broader market's climb of 3.6%.
Healthy Consumer Electronics Cycle Ahead
Take a look at the accompanying chart. As a reminder, the jagged blue line represents the subindustry index's rolling 52-week price performance as compared to the 52-week performance for the S&P 1500. 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 index's long-term, mean relative strength.
There are three large-cap companies in the S&P 1500 Computer & Electronics Retail Index: Best Buy (BBY), GameStop (GME), and RadioShack (RSH). Circuit City (CC) is a non-index member.
Michael Souers, the analyst who follows theses stocks for S&P Equity Research, has a positive fundamental outlook for the computer and electronics retail subindustry. He thinks a healthy consumer electronics cycle, including hot products such as advanced TVs, MP3 players, video game consoles, and digital imaging products, will fuel sales growth in 2008. With expectations for continued declines in average selling prices for advanced TVs, Souers believes these products are becoming more affordable to most consumers. As for competition, S&P thinks retailers that best differentiate themselves, either through service, marketing, or product mix, will benefit.
Downloadable Content May Hurt Media Sales
Souers expects further development and increased adoption of digital products to boost future sales of consumer electronics. At this point in the cycle, he sees declines in average selling prices, which S&P thinks are hurting manufacturers, helping drive demand, and benefiting retail sales. As new products are introduced, Souers thinks management of inventories and product mix will become increasingly important in determining which retailers will be the most successful.
Longer term, he expects an increasing convergence among computers, TVs, cameras, and telecom equipment. This should include portable devices that make it increasingly easy to gain access to information and entertainment. As for the impact of the Internet, S&P believes the rising availability of entertainment for downloading from home is likely to hurt long-term sales of prerecorded media at stores. Souers believes the extent to which the Internet is used as a medium for downloading or distributing recorded entertainment is likely to depend, in part, on the pace at which consumers switch to faster Internet hookups, through means such as cable modems and digital subscriber phone lines. Also he expects retailers will have increasing opportunities to sell devices that play downloaded content and possibly sell new subscription services for music and video.
So there you have it. The group's strong relative strength and positive overall fundamental outlook support our favorable expectation for equity price outperformance in the coming 12 months. Of the stocks mentioned above, Best Buy carries an S&P investment ranking of 5 STARS (strong buy) while GameStop, RadioShack, and Circuit City are each ranked 3 STARS (hold).
Industry Momentum List Update
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), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).