Wall Street vs. Main Street Investment Attributes
Market leadership is constantly changing as sub-sectors come in and out of favor and particular investment attributes ebb and flow in popularity. One new theme in 2016 is the resurgence of “Main Street” type investments and overall investment exposures relative to “Wall Street” investment exposures. More simply put, mass market exposures are outperforming higher-end, upper income/luxury exposures. Within the consumer space noteworthy moves and investment shifts are underway as some of 2015’s high fliers are dramatically tumbling back down to earth.
A stark example is Restoration Hardware. The stock is cut in half since the start of the year and down some 60 points, to $40, from prices above $100 just last fall. The culprit for RH is a dramatic sales and earnings miss in a promotional environment for furniture. A notable pick up in stock market volatility since the fall, combined with the difficult start to the year, proved enough to get consumers to reign in purchases of ultra-discretionary high-end Restoration Hardware furniture. When investment accounts and 401ks take a hit, it lessens the appetite for $3,000 coffee tables. At a minimum, the purchase can be deferred. RH management acknowledged that markets impacted by oil and currency are experiencing a 20 point drag relative to other markets, with weakness across Canada, Texas, and Miami. Moreover, the increased volatility in January disrupted high-end consumer buying patterns.
Contrasting the plunging stock price at RH, results across mass market department stores, Wal-Mart, and Target have been about “as expected”, yet investors are violently shifting into these stocks. Some year-to-date stock price performances:
JC Penney +44%
Wal-Mart +8.5%
Target +6.3%
TJX +6.7%
S&P 500 -4.7%
Based on tone from management teams, and forward guidance, one gets the feeling that it’s probably as bad as it gets for mass market sales growth and stock prices. After all, low gas prices disproportionately aid the lower-middle income consumer, and the job market remains strong despite heightened stock market volatility. In the case of JC Penney, same store sales are outperforming results at Macy’s and Nordstrom by a wide margin.
Whether mass market leadership can continue will depend on the job market remaining solid with oil subdued. A recession, when it next comes will be a drag for both the high-end and low-end but it’s worth reviewing some mass market exposures in the event we get a muddle through US economy and year for the markets. CJF particularly likes JC Penney, as operations are improving, the company is turning around from Ron Johnson’s disastrous transformation attempt 5-years ago, and a high debt load is being paid down aggressively with surging cash flows.
Normalized stock price performance of JC Penney vs. Nordstrom (July 2015 to present):
