Investors are watching U.S. consumers very closely. Usually shopaholics, Americans are clutching their wallets more tightly these days as they face down a weak economy and rising gas and food prices.
Consumer stocks rise and fall based on where Americans spend their hard-earned money, or, more recently, their government stimulus checks. And so far it's clear that dollars have flowed toward cheaper options.
Above all, that trend has helped Wal-Mart Stores (WMT), the world's largest retailer. Wal-Mart saw its stock jump 24% in the past six months even as the rest of the stock market slid lower. "Wal-Mart has seen a new group of customers come into the fold," says Georges Yared of Yared Investment Research. Middle-class consumers are finally deigning to visit the chain known for its discounts.
Can the High End Hang On?
While consumers continue "trading down"—swapping, for example, brand-name clothes at the mall for discount Wal-Mart attire—Wall Street is trying to figure out which companies will be helped, and which will be hurt, by that trend. Furthermore, investors wonder how long the trend will last. Can higher-end firms find ways to hold on to customers even in a serious downturn?
Expert investors offered advice on these questions, but they also acknowledged that it's difficult predicting where fickle shoppers will spend. For example, in April, Gap (GPS) managed to hold same-store sales steady at its higher-end Gap and Banana Republic stores. However, its low-priced Old Navy stores saw sales plunge 12% from a year ago.
In the world of retail, restaurants, and other consumer stocks, success can be determined less by the economy than a company's product mix, advertising, and other factors.
Quincy Krosby, chief investment strategist at the Hartford (HIG), says that in better times, middle-class families have often stretched to buy "affordable luxuries," expensive but still affordable products from firms such as Coach (COH) and even Tiffany (TIF). But Krosby expects consumers to forgo many luxuries and instead shop at discounters. "When consumers feel really nervous about jobs and/or gasoline prices, you're going to see them hunker down," she says.
Elsewhere in retail, Family Dollar Stores (FDO) shares are up 14% since the start of the year, as investors bet that squeezed lower-income consumers will turn to dollar stores for rock-bottom prices.
Not Feeling So Well-Off
But it's not just poorer Americans who are looking for deals. Consumers have flocked to discount warehouse club Costco Wholesale (COST). Many of the club's members are "relatively well-off people," says John Massey of AIG SunAmerica Asset Management.
Even shoppers at high-end grocery chain Whole Foods Market (WFMI) seem to be cutting back just a bit. Known sometimes as "Whole Paycheck" for its pricey groceries, Whole Foods said on May 14 that same-store sales grew 5.7% in the first four weeks of the quarter. Other chains would be envious of that figure, but it's slower than last quarter's 6.7%.