Consumer stocks, the stars of the '80s, suddenly are Wall Street's biggest question mark.
Over the past year, and particularly over the past few months, some of the best-known names in many key consumer products businesses have seen their stocks devastated. The culprit has been a slowdown in sales as consumers have tightened their belts or abandoned some former favorites for other products or brands.
The casualty list includes fast-food king McDonald's, appliance maker Maytag, the Hartmarx men's clothing firm, textile giant Fieldcrest and retailers J. C. Penney and Toys R Us. All have seen their stocks fall far more than the 13% drop in the Standard & Poor's 500 index from its peak.
Many analysts are calling this a normal cyclical drop in the stocks, tied to a normal cyclical decline in consumer spending that may or may not lead to outright recession. But there's a deeper fear lurking: What if some consumer goods and services sectors are entering not a cyclical decline but a secular one--a trend that could extend well into the 1990s?
Marshall Acuff, market strategist at Smith Barney, Harris Upham in New York, notes that many key consumer businesses already have tumbled into deep slumps. "We've lost the publishing stocks over the last few years, and we've lost the hotels, like Marriott and Hilton," he says. "Some might argue that we're now losing McDonald's."
The cold reality for consumer goods and services providers, Acuff says, is that "we're not going to see the exuberant consumer in the 1990s that we saw in the 1980s."
Indeed, the aging of the American population, and the maturing of the baby boomers, has long been expected to translate into slower consumer spending and a higher savings rate over time. The argument is that the boomers, in particular, have practically everything they need after their spending binge of the 1980s--everything except the money to fund their children's college education or their own retirement.
No one is suggesting that consumer spending is simply going to collapse. But if the trend over the next few years is for a greater emphasis on staying at home and saving than going out and spending, then the growth rates of many consumer companies may be lower than what Wall Street anticipates. The experience of McDonald's, Hartmarx and Penney could be an early warning.
And for those consumers who need an extra push to exit the ranks of the freewheelers, Congress may soon oblige: A proposal now is circulating on Capitol Hill to impose a special federal "luxury" tax on purchases of goods such as jewelry and boats to help reduce the government's gaping budget deficit.
Some money managers, however, warn that it could be folly to speak too generally about consumer trends. "We have a lifestyle in this country to be pretty good spenders," says Robert Kommerstad, chairman of Pasadena-based Provident Investment Counsel, a major investor in many consumer goods companies. While spending may slow, he says, to assume that America in the 1990s will mimic Japan in the 1980s--high savings, low consumption--is probably going too far.
Moreover, companies in the food and drug businesses, among other consumer areas, sell goods that people can't very well go without, no matter what the economy, Kommerstad notes. And many of those companies also are big players overseas, which means they're much less dependent on the actions of American consumers than they were 10 years ago. "I don't think anything can get in the way of a consistent rate of growth for those companies," Kommerstad says.
So far, that seems true for many of the firms. For example, at an Aug. 22 meeting with analysts, Coca-Cola management "indicated that the soft drink business is as solid and predictable as ever," says analyst Lawrence Adelman at Dean Witter Reynolds. Recession or no, Coke is comfortable with analysts' estimates of $2 a share in earnings this year, up 20% from last year, Adelman says.
Kommerstad also notes that a spending slowdown ultimately could benefit the strongest players in many consumer sectors, "because in tougher times the marginal guy gets squeezed." That could leave more market share for the strongest companies to grab.
Still, investors now may need to worry as much about perception as reality in looking at consumer stocks. Retailers, food companies, apparel firms and leisure-time companies were red-hot stocks in the 1980s, riding the consumer spending boom. But no trend lasts forever, and when change comes it is often unrecognized--and even denied--by investors until it is well along. Remember how, in the mid-1980s, many investors refused to believe that small stocks could have peaked in 1983?
If the market is suddenly perceiving that growth in consumer spending is coming down, and likely to stay down, the consumer stocks' still high price-to-earnings ratios could be slashed much more than they already have been. Even the strong players could be penalized, at least for a period of time.
"I don't think you can just write off these companies, but I agree that the (P/E) multiples are too high," says Fred Astman, a money manager at First Wilshire Securities in Los Angeles. Look at it this way: If the market decides that, in a slower spending environment, Toys R Us should sell for 15 times earnings rather than 20 times earnings, the stock would go from $23.50 now to $16.75, even though it has already plunged from $35.
For investors who've ridden the consumer stocks' magnificent gains from the 1980s, now may be a good time to consider selling at least a portion of your holdings, especially if your stocks still appear to be anticipating strong growth ahead. By next spring, we all may be filling the shopping malls again, buying like crazy. But in this market, hedging one's bet is the wiser move.
Briefly: The nation's regional stock exchanges are likely to merge with the major exchanges or disappear over the next 10 years, the chairman of the American Stock Exchange said Tuesday. In a speech in Washington, James Jones predicted that only the three largest stock markets--the New York Stock Exchange, the National Assn. of Securities Dealers' over-the-counter market and Jones' own Amex--will survive by the year 2000. That may sound self-serving, but Jones maintains that cost pressures are killing the smaller exchanges. . . . Torrance-based Standard Brands Paints, the home decorating retailer, is having a tough time in the slow economy. But Kansas City, Mo., investor John Latshaw continues to raise his stake in the chain. Latshaw, head of Latshaw Enterprises, bought 149,200 more Standard shares between July 10 and Aug. 30, according to an SEC filing. He paid between $8.75 and $12.125 apiece. The purchases raised Latshaw's stake to 811,515 shares, or 14.2%. Standard stock closed at $7.50 Tuesday, a 52-week low. . . .
The Chicago Board Options Exchange is introducing the first long-term put and call options on individual stocks, beginning Oct. 5. The options to be issued first will expire in either July, August or September, 1992, and will cover 14 blue chip stocks, including AT&T;, Exxon, Boeing, IBM and McDonald's. Options currently extend for less than one year. The new options will give investors a long-term tool for hedging their holdings.
CONSUMER STOCK CASUALTIES
Consumer stocks have been devastated both by a real slowdown in spending and by fears of a much worse slowdown ahead. Some of the hardest-hit stocks:
52-week Tues. Drop vs. Stock high/low close high Fieldcrest 29 1/4-$8 1/2 8 5/8 -71% Hartmarx 27-9 3/8 10 -63% Outboard Marine 33 3/8-13 15 -55% J.C. Penney 75 5/8-43 1/2 44 5/8 -41% Maytag 23 3/4-13 3/8 14 1/8 -41% Amer. Express 39 3/8-22 23 7/8 -39% Toys R Us 35-21 7/8 23 1/2 -33% McDonald's 38 1/2-25 5/8 27 3/4 -28% Wal-Mart 36 3/4-18 1/2 26 3/4 -27% S&P; 500 369-307 321.05 -13%