Top Performing Consumer Stock of the Past Decade

Key Points

• The luxury home furnishings industry is highly fragmented & without a dominant brand.

• Creative thinkers and visionaries are always under-estimated, which offers opportunities.

• RH is the most exciting luxury brand in the current market and very few investors own the stock.

The luxury home furnishings industry is highly fragmented but there’s a Mega Brand coming

As a follow-up to my last post on the massive investment opportunity in leading luxury goods brands, I wanted to drill down into a particular category within the luxury goods industry.  If you have ever been interested in upgrading your home or second home with luxury home furnishings, you likely have experienced frustration & a customer shopping experience filled with friction. Here’s what I mean. Let’s say you have a mountain house in Tahoe. You may or may not have strong design acumen, you may not know what your personal style is, and you absolutely don’t have a store in Tahoe that can help you solve these problems.  It’s certainly not easy to find a store that will allow you to touch and feel all the pieces you may need or that has experienced designers willing to spend time with you to create the amazing space you have in your head.  Now compound this problem across the globe and you have a real opportunity to delight global consumers.  How big is the opportunity to serve global wealth? Boston Consulting Group (BCG) highlights in a recent report that total wealth – financial assets and real assets minus liabilities – rose by 7.2% in North America to $136 trillion; by 9.5% to nearly $117 trillion in Asia ex-Japan; and by 4.1% in Western Europe to $103 trillion in 2020. BCG estimates total global wealth to be roughly $431 trillion in 2020. That’s a massive amount of wealth looking for the most relevant brands across important spending categories.

One would think there would be at least one global brand serving every important spending category that included luxury home furnishings.  Sadly, the home furnishings industry is filled with small, local boutiques and mostly mass-market brands like Pottery Barn & Williams Sonoma in the U.S.  Something else needed to be created to fill a major void in the industry. Enter RH (Restoration Hardware).  If you think of RH as you did about the old Restoration Hardware, you’re completely missing the opportunity as a consumer and an investor.

Visionaries are always under-estimated

Human beings tend to cluster together, there’s perceived safety in numbers. True visionaries, however, are happier standing alone, are courageous and willing to make bold decisions. As an investor, I always look for companies that have differentiated products and services, a large and global addressable market opportunity and management teams that are willing to think differently than their peers.  I’ve been investing for over 28-years, and I can tell you, finding true visionaries serving enormous & untapped opportunities is harder than it sounds. When you find these wonderfully rare opportunities, you seize them as an investor, and you don’t let the market shake you out of the positions just because there’s some short-term noise. If you do the work and stay committed as long as the thesis stays intact, some wildly attractive gains can accrue to your bottom line.

Fun fact: RH is one of the top performing consumer stocks of the past decade and most investors don’t even have this company on their radar yet. Since the IPO on November 2, 2012, at $24 per share, RH’s stock price appreciation has outperformed a majority of the most relevant brands through the end of their fiscal 2020. Those names include Apple, Amazon, Google, Facebook, Nike, Starbucks, LVMH, Home Depot, Hermès to name a few. Even more impressive is the company’s acumen at buying back stock at severely discounted prices. In likely the greatest capital allocation decision in history, RH bought back almost 50% of their stock under the $50 level by mid 2017. The stock is currently $681 as I write this post on Monday, June 21st.

RH is just getting started and the world is starting to notice

If you have never visited an RH Gallery, I urge you to do so quickly if you are an investor and/or in the market for an entirely updated luxury home goods experience. These galleries instantly become the centerpiece of each community, and many have rooftop decks and restaurants. RH is not just a luxury home furnishings brand, they are blurring the lines between luxury retail, hospitality and leisure. That’s never been done before, certainly not at scale. Even after multiple blow-out quarters, most of the analyst community still under-estimates the future potential and estimates and target prices are absurdly low.  When the CEO says RH has the potential to become a $20 to $25 billion global brand, I suggest people take him at his word. Global expansions take time and always have some short-term hiccups, but I have no doubt the brand will achieve its stated goals. If you want more evidence of a strong fundamental story, Berkshire Hathaway owns about 8% of the company the last time I checked their filings.

The galleries are quite possibly the most effective marketing symbols for any brand I’ve ever seen. When you walk by, you can’t help but go inside and do some dreaming. RH is much more than a walk-through gallery, however. It’s a full-service interior design center where designers will help you create your dream home room by room. To help remove the friction with your spending, RH created a membership program which is enormously valuable to consumers. For a $100 annual fee, members get 25% off on all full-priced items, an additional 20% off on all sale items, complementary services with RH Interior Design, preferred financing with great terms and early access to clearance events.  Below is a picture of RH Nashville, it’s truly the talk of the town.

RH products are presented across multiple collections, categories, and channels and their desirability and exclusivity has enabled RH to achieve industry leading revenues and margins. There’s RH Interiors, RH Modern, RH Beach House, RH Ski House, RH Outdoor, RH Rugs, RH Lighting, RH Linens, RH Baby & Child, RH Teen, and Waterworks. They currently have museum-like galleries in NY, Chicago, Boston, West Palm Beach, Greenwich, Tampa, West Hollywood, Los Angeles, Marin (Bay Area), Yountville (Napa Valley), Nashville, and Dallas with more to come in San Francisco, Oak Brook (suburb of Chicago), and Jacksonville. In total they have 70+ galleries in the U.S. and Canada with more coming across the globe starting next year with the opening of RH England, The Gallery at Aynhoe Park, a 73-acre historic estate designed in 1615 by Sir John Soane, arguably one of the most respected and celebrated architects of his time. RH even has private planes via RH1 and RH2 and RH3, a luxury yacht, is currently available in the Mediterranean and Caribbean. The RH Bath House & Spa in Aspen is also scheduled to open in the second half of 2022. RH is no ordinary luxury furnishings brand; they are constantly moving the goalposts and thinking much bigger. As a dedicated global brands investor, I can’t help but get swept up in the story & vision Gary Friedman and his team has.

Summary:

• The luxury home furnishings industry needs a dominant global brand.

• Dominating any category requires true vision and an outside the box approach.

• RH has the visionary CEO, the differentiated strategy and the global opportunity to dominate the luxury home category. Blending retail, hospitality and leisure offers an economic moat worthy of the premium valuation RH is destined to achieve.

Disclosure:
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

---

The Current Global Luxury Goods Investment Opportunity

Key Points

• Total household wealth as of 2020 has grown at a blistering pace to roughly $399​​ trillion1.

• Luxury goods consumption grew at a stable CAGR of 5.9% from 1996-2019.

• The most relevant luxury goods brands have significant track records of outperformance

The wealth effect is real

 Wealth around the world has never been higher. Between​​ strong home price appreciation globally and a decade long equity market bull market, total household wealth is approximately $400 trillion. Yes, you heard that right, $400 trillion. ​​ Human beings are very predictable in many ways and their interest in consuming luxury goods and services has never been higher. With so much wealth around the globe, there are significant tailwinds present for the most relevant brands across all spending categories. No matter what income status a consumer has, the interest in spending a portion of​​ one’s​​ savings is always present. ​​ In the U.S. alone, the personal savings rate is now roughly 27%.​​ 

 As a reminder, roughly 7% savings rates are normal over a long period of time so savings rates here are significantly elevated and likely to mean revert lower over the next 12-24 months. ​​ Given this savings data, I’m not sure if there’s any​​ phenomenon with better tailwinds than​​ the​​ future​​ of​​ consumer spending.​​ If nothing else, it will be a​​ stable thematic and stable is something that we all enjoy when we are talking about our investments.

Luxury goods consumption is stable and predictable

With the new buy now, pay later finance category, consumers from all income levels can now access a broad category of luxury goods.​​ The stable, long term growth rate of the luxury goods industry could be ready to accelerate.​​ Normally, the most expensive luxury goods brands were available only to a sub segment of the population so this innovation in specialty finance has broad implications for consumer spending trends. Most consumers have aspirations outside of the normal spending they do​​ and many of these luxury brands are where consumers tend to focus. The leading luxury goods brands should benefit disproportionately as consumers around the world reach for their favorite products​​ from their favorite luxury brands. China, in particular, has shown a voracious appetite for luxury brands as the growing middle class across China and Asia continue to consume​​ products across all spending categories.​​ Chinese consumption of luxury goods is set to grow by 60% between 2018 and 2025 (McKinsey estimate), well above the growth rate of broad consumer spending generally.

Data source: Emles Advisors LLC.

The most relevant brands serving the luxury category have strong investment track records

 If a spending category grows in a stable, predictable fashion it’s only logical the most relevant brands serving this theme should offer​​ attractive​​ investment returns, particularly when a brand is serving a global audience of consumers. ​​​​  

If a brand and its luxury goods appeals to kids through older adults, you get a perfect storm of revenue opportunities. That’s what I see currently for many of the leading luxury brands. Some might not seem like “luxury” products but luxury just means higher price points, higher quality merchandise and strong pricing power due to high brand love and loyalty. The image below highlights some of the most popular luxury goods​​ brands and their 5-year returns versus the S&P 500 as of May 19, 2021 via Ycharts. 

Source: Y Charts

For my​​ current opinion on 3 of these great​​ luxury brands, click the names of​​ LVMH, Tesla or RH:

Louis Vuitton​​ (LVMH): operates five luxury segments: fashion & leather goods, watches and jewelry, wines and spirits, perfumes and cosmetics, and selective retailing (Sephora & duty-free stores).

Hermes:​​ a​​ 180-year-old​​ luxury company best known for its Birkin & Kelly bags. Also leather goods, clothes & accessories, silk & textiles, perfumes, watches and jewelry and home furnishings.

Tesla:​​ as you know is the leading EV auto manufacturer by far. Their tech lead is enormous.

RH:​​ if you haven’t been to a RH (Restoration Hardware) gallery or restaurant, I urge you to visit. They are building a global empire and becoming the LVMH of luxury home furnishings.

Ferrari:​​ who doesn’t dream about owning a $350k luxury sports car! The company has software company margins in a low margin auto industry. Wealthy consumers all over the world beg to get on the waiting list for these amazing vehicles.

Apple:​​ iPhone,​​ iPad, Mac, earbuds,​​ Apple TV,​​ MacBook’s, their product lineup is endless and demand is insatiable.

Estee Lauder: the world leader in global prestige beauty with dominant market share​​ in key categories like: skincare, makeup, fragrance, haircare with brands like Clinique, MAC, & Aveda.

Williams Sonoma: the pandemic has been very kind to all things home-related and they have become a very popular house of brands like: Williams Sonoma, Pottery Barn, Pottery Barn Kids & teens, and West Elm.

Kering: not a well-known brand in the U.S. but I’ll bet you are very familiar with many of the brands under their umbrella: Gucci, YSL, Bottega Veneta. A very popular brand in high-end apparel, particularly in Europe.

Lululemon: the heavily popular yoga and athleisure brand that’s become a global sensation. Last year in the middle of the pandemic they spent $500 million to buy home fitness company, Mirror so there’s a new way to connect fitness and apparel purchases.

Reality

Most investors have very little exposure to the important luxury goods​​ brands. I​​ think I have proven the opportunity is attractive and the performance history of the most relevant brands is robust. ​​ An investor can certainly gain exposure through a brands-dedicated investment and now, there’s an ETF that offers access in a very laser focused way. Our view has always been that every investor needs a consumer core equity holding and should consider satellite positions around the core that are tied to other large, predictable themes with strong growth characteristics.​​ My personal goal is​​ to educate, inform,​​ entertain,​​and hopefully add value to your day by showing you ideas and investments you may not know exist.

Check out​​ my recent conversation with Emles founder Gabriel Hammond who has a very interesting story as a serial entrepreneur.

Episode 10: Mega Brands – Interview with Luxury Goods ETF founder, Gabriel Hammond

Summary:

• The luxury goods​​ category is thriving​​ as global wealth reaches all-time highs.

• With the new buy now, pay later fintech options available to consumers, more luxury goods will become more reachable to the masses of global consumers.

• This makes the thematic a wonderful allocation in portfolios through brands you aspire to owning.

Disclosure:
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

---

Savings Rates are Back to Historic Levels. Here’s What it Means for Investors

Key Points

• The U.S. Savings Rate just went parabolic again, that bodes well for consumer spending trends.

• Today’s rise in savings rates is very different & positive for consumption trends.

• Consumption capacity drives future spending. This drives positive GDP.

Personal Savings Rates are currently at 27% (Bureau of Economic Activity, April 30, 2021):

Wow is all I can say after looking at the BEA’s Savings Rate report. Total personal saving was $6 trillion in March which drove the savings rate just over 27% when you add the epic amounts of new cash people are getting. For perspective, savings rates peaked at 33% in April 2020 as the Pandemic was just getting started.  Spending is in our DNA, it’s quite possibly the most predictable phenomenon I know of. The government can halt our spending in certain categories but we will find a way to use that credit card and debit card and buy the things we want and need regardless of the economic environment. After the 33% peak, savings rates fell like a rock into November 2020 when they troughed around 12% and then began to rise slightly. It’s been a tough 15 months for all economies and consumers but thankfully business activity, vaccine rollouts, consumer confidence and future spending capacity appear to be on the mend. This month’s rapid rise in savings rates should not be surprising however, but it should prove to be a temporary situation. Savings rates have recently benefitted from continued unemployment benefits, one-time stimulus payments, tax refunds and wages.

Today’s rapid rise in savings is different & a very positive sign for spending trends:

The chart below is a very encouraging chart. It shows Savings Rate, Retail Sales, and Consumer Spending & Transactions on Consumer Services. Normally, when the white line of Savings Rates goes vertical, Retail Sales and Consumer Services & Card transactions go in the opposite direction as consumers re-trench. That’s what happened early in 2020 and during every other slowdown I could find. Historically, once savings rates go parabolic, a strong investment opportunity presents itself. When people start to feel more comfortable about the world and their personal situations, they begin to spend normally which drives savings rates back towards “normal”. That’s the situation I see in front of us currently.

The current situation is very unusual & robust. Retail sales, consumer confidence, and consumer transactions data did not fall off a cliff, they are all rising together. What does all this mean? It means continued good times are ahead for consumer spending via sustained retail sales and the consumer services recovery. Credit card use, travel plans, apparel purchases and other pent-up spending habits should get closer to normal.

There’s roughly $2.2+ trillion in forced savings that is now being released into the economy. 

The Consumer Services sector, our biggest overweight position, should be a major beneficiary as savings rates converge back towards normal. This is NOT a 1-year phenomenon, it will take a few years for the historic amount of savings to trickle through the economy making this theme stable & predictable. Exactly what we like inside a portfolio. Brands benefit most when consumers open their wallets.

Enormous amounts of consumption capacity has significant investment implications.

Let’s dig deeper into this chart and see if we can connect the dots to some opportunities. Reminder: the market has had a decent run YTD and under the hood, there appears to be a rolling correction under way. Volatility is the friend of long-term investors so please use whatever weakness we get over the coming days and weeks to upgrade your portfolio’s and add some consumer dedication because the above chart is very bullish.

Savings rates tend to be 7% over the long-term, that’s a very bankable base case. They are almost 4 times higher than that currently so we know this is well out of the “norm”. These types of events offer significant mean reversion opportunities. Is there any evidence this opportunity is currently beginning? Absolutely, look at the green and blue lines going vertical with the savings rate. That means consumer spending is already recovering nicely. We hear it in earnings reports from airlines, travel companies, consumer goods companies, and through the big bank earnings. Ignore the short-term noise of the markets and use weakness as an opportunity, this trend has significant legs. Virtually all of the hard and soft economic data is at the upper end of its long-term extremes so we all should expect this data to start to trend lower while staying at elevated levels. I have looked back over long periods of time and back-tested how equities perform as elevated data slows down while staying high on an absolute basis. There does not seem to be a high correlation between strong data falling and falling stock prices. Anything can happen at any time but the important thing to remember is the trend is your friend. The current trend of getting out into our neighborhoods and eating, drinking and getting back to our old lives is in full force. As employees of companies begin to go back into the office, upgrade their wardrobes, look to travel and see clients and prospects, a resurgence in many commerce categories will occur. It is about time. And then there’s the summer travel season, have you ever been this ready to explore outside of your local community? I certainly haven’t.

I think it’s time to embrace “normal” and the data says we are well on our way.

Disclosure:
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

---

U.S. Consumer Confidence Returns to Pre-Pandemic Levels

Key Points

• Overall U.S. Consumer Confidence for April rose to 121.7*, a very bullish reading.

• The Present Conditions Index & Expectations Index also rose strongly.

• High consumer confidence, excess savings & massive wealth transferring is bullish for spending.

April Consumer Confidence

Consumers drive roughly 70% of U.S. economic output. Collectively, we are a very important cohort to track for the overall direction and health of the economy. The consumer, here and abroad, is the most important factor driving economies which makes our actions and expectations key to the stock market. Whether we realize it or not, consumer spending and our sentiment towards spending is highly correlated to the direction of the economy, which is highly correlated to the direction of the stock market. This knowledge is what drove our team to create the Dynamic Brands equity strategy in 2016.

For perspective, I thought I would compare the important consumer confidence readings from today’s report to last April, 2020. What a difference a year makes. In April of last year, consumer confidence fell through the floor as the pandemic and fear spread around the world. Confidence readings fell from 118.8 in March 2020 to 86.9 the following month. That was the lowest reading in 6 years and one of the lowest readings since the survey was created. The moral of the story here: things are generally never as bad or as good as they seem in the moment and when we see extremes, there’s typically an opportunity to fade those extremes in search of something less extreme. Hurricanes don’t last forever. The bulk of readings and human experiences often fall between positive and negative extremes so it’s important not to over-react. Today’s high readings likely have a few more months of strength but those extremes should be expected to mean revert back to normal levels as the pandemic fears ease and the economy continues to heal. Here’s the good news, steady and high readings are bullish for economic activity, often the stock market and consumer stocks. That’s the future we see for the rest of this year where consumer confidence is concerned.

Consumer Present Conditions Index

This sub-index is based on consumers’ assessment of current business and labor market conditions. In April of 2020 the reading was 76.4, today it’s back to 139.6. I have to believe these readings are somewhat influenced by the stock market, housing prices and the current overall belief that a path to normal life is within our grasp. A continuation of the unemployment benefits into September is also very helpful where sentiment is concerned. I suspect when we see the overall GDP report it will be very strong and sustainable as more people get back to work and $2.2 trillion of savings, tax refunds and unemployment benefits begins to trickle into the economy. From a consumption perspective and a read-through into consumer spending focused stocks, some strong fundamental news lies ahead.

Consumer Expectations Index

This index is based on consumers’ short-term outlook for income, business, and labor market conditions. The index in April 2020 fell to 93.8. Today’s reading was 109.8, so continued improvement in expectations for better times ahead. What I like best about this report was the positive expectations for future income component. When we feel good about our income prospects, we feel better about making additional purchases of goods and services. I have written a few times in these blogs about our positive opinion regarding the U.S. consumer services sector in particular as discussed in “Don’t Ever Underestimate the Consumer.” This sector is by far our biggest overweight in the Brands equity strategy. Vacation intentions posted a robust increase in today’s report which bodes well for economic activity and spending in that badly hurt sector of the economy. Sadly, these companies are still struggling to find workers as many of the potential hires are being paid to not work through their unemployment benefits. Do not be surprised by a lack of services when you take your vacations this summer. Over time, this industry will get fully back on its feet and the services we love and expect will be back.

What’s the upside to this short-term situation of a lack of workers in the travel and leisure industries? Higher profitability and margins for the most well-run brands. Many of these businesses, out of survival, have now learned to stay profitable at much lower occupancy levels. If demand surges back but your cost structure is less, your margins expand and you likely outperform analyst expectations. When that situation occurs, stock prices often react favorably. That’s what I am expecting for Q2 and Q3 earnings reports. Everyone expects there to be high pent-up demand for travel and vacation spending, that’s likely in the current prices of these stocks. What is not built into stock prices currently is the higher estimate revision cycle that will come once these companies show higher profitability from their current predicament. Long-term, a poor experience and lack of services is terrible for brand loyalty but short-term its wonderful for profitability.

The Silent Boost to Consumer Spending: Wealth Transfer

With better job prospects that lead to strong income and confidence, consumer spending trends seem quite favorable for the rest of the year. With $2+ trillion collecting in the system, some of this money has begun to get unleashed into the spending economy. This excess savings should continue to be a stabilizing force in our consumption economy for a few years as savings rates normalize back towards normal levels around 7%. There’s an extra silent boost that I will write about in future blog posts: the largest transfer of wealth in human history is now underway. Baby Boomers and their parents, the Silent Generation have accumulated a massive amount of wealth over the last 5 decades. As the Boomer generation in particular ages, they will begin to pass their assets to their children and grandchildren. From a psychological perspective the results are very clear: when money falls into your lap, you tend to spend some and save some. The amounts to be spent each year from wealth transfer are harder to isolate but look around, it’s happening everywhere and by the year 2061, PNC Wealth predicts over $59 trillion will have passed from older generations to younger ones. A Wealth-X report shows about $15 trillion passing by 2030. That means a staggering amount of money is passing very slowly each year and then all at once upon full wealth transfer. Money passing from savers who spend to spenders who save is a very robust additional source of consumer spending that few people talk about. This transfer of massive amounts of money will affect GDP, retail spending, art, collectibles, and real estate markets over time. Because of this, the consumer services sector seems to have a very bright future.

Yes, the business cycle always matters and there is bound to be speed-bumps along the way, but the consumer spending thematic seems to have a very long and positive tail indeed.

*Source: April 2021 Consumer Confidence Survey®

Disclosure:
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

---

The Sevices Sector Mean Reversion Continues

Key Points

• The ISM Services report1 for March highlights the surge we have been expecting.

• Job growth, particularly across services sectors, continues to recover strongly.

• Consumption of services should continue through summer until it levels off.

I have written about the mean reversion opportunities across many important spending categories for six months. Monday’s ISM Services report highlights the robust recovery we are seeing across many of 2020’s laggard industries like travel, restaurants, and leisure services. As consumers were stuck in their homes and not able to gather as they love to do, the durables side of the economy experienced a historic renaissance. The global pandemic disrupted supply chains across the world while the stay-at-home mandate created wicked demand for all kinds of consumer durables. If you have tried to buy a refrigerator or washer/dryer lately you know what I mean. The shipping delays have been unprecedented leading to strong pricing power for the leading brands serving important consumption categories. While many of the supply chain issues are in the process of being solved, a new pick-up in demand is happening across the services sector. Many of the leading brands serving this sector had very difficult years last year but the tide is turning, and consumer demand is snapping back aggressively. As investors across important consumer trends, we are very excited about the services sector exposure we currently have. For perspective, I have inserted a chart of the ISM Services report that goes back to 1997. As you can see, the services sector and readings from ISM have never been higher. When the rubber band stretches one way too far, the snap-back is often just as fierce in the opposite direction. That’s what we are seeing now and why many of the top services stocks are sitting at all-time highs even as their businesses are just now starting to recover. Reminder: a reading over 50 indicates growth in the services sector so a 63.7 reading says there’s epic demand as the economy opens more broadly and vaccination rollouts continue. March is the first month the Services report has reached the recent 64.7 level seen in ISM Manufacturing.

Source: Bloomberg

The recovery appears to have multi-month legs before it should be expected to revert back to a more normal range. Supply chain issues and a lack of sufficient labor (why work if you’re receiving unemployment benefits) are two key reasons the most in-demand brands will have strong pricing power which we will start seeing in quarterly earnings reports. In my opinion, analyst estimates are too low for many of the services stocks and revisions will begin once we start reporting earnings later this month. Everyone expects a return to travel and eating out etc., but I see no real evidence of this knowledge when I look at the revision trajectory from sell-side analysts. There’s a big ah-ha moment coming for many of these services-related stocks.

Think about the services that are just beginning to open across the country. The pent-up demand for many of these services will be historic for the bulk of this year. Things like: movie theatres, theme parks, air travel, restaurants, hotels, Airbnb’s, sporting events (this week’s Texas Rangers game was at full capacity), and casinos are seeing strong interest. Last week I took the family for a 2-day quick vacation for our daughter’s spring break and the hotel was packed and prices were high. Hotels and airlines in particular should experience historic pricing power until we get back to normal.

Then there’s the not so obvious potential recovery industries like the pent-up demand for elective surgeries, long overdue doctor visits and the prescriptions being written post-visit. Additionally, the apparel industry should see a strong snap-back as people purchase “going-out” clothes, cosmetics, shoes and accessories. Here’s the rub, very few portfolios have sufficient exposure to the services and companies that should experience strong rebounds.  Sometimes the most obvious opportunities get overlooked.  We are very excited about the exposure we have to this important sector.

The Employment Report, March 2021

There’s no doubt, hiring has picked up. I suspect hiring across the services sector would have been even more robust were it not for the extension of unemployment benefits. Total nonfarm payroll rose by 916,000 in March as the unemployment rate fell to 6%. Real unemployment is likely a bit higher, but the trends continue to move in the right direction. Within the report, gains across leisure & hospitality, public and private education, and construction were the most favorable. Furloughed employee hiring was strong as many laid off workers returned to their positions. With more people having jobs, more consumption will occur and the brands that we favor most in consumption categories should see strong revenue and earnings trends. Here’s the inputs that drive consumption:

Consumption capacity = the sum of wages and all income + unemployment benefits + savings rates + household net worth gains + the amount of revolving credit card availability + consumer sentiment.

For now, wages are strong, many are rising, unemployment benefits are still coming, savings rates are historically high at over $1.5 trillion, and debt to total household net worth are at a 40-year low. All that spells positive trends for continued and accelerated consumption. I call that goldilocks for the consumer and consumer stocks.

Consumer Services Stocks Appear Very Attractive

The market is a discounting mechanism and stocks tend to see the future before the actual data proves the thesis. Nowhere is that more evident than in the stock charts of many of the top services brands. Great businesses on sale will always attract buyers and the recovery trajectory in stocks across services is clearly in place as many names hit 52-week highs. We still need the confirming evidence of the recovery which should begin to arrive this earnings season and with further confirmation in the July reports. This should lead to further positive revisions and attractive stock price gains. Again, everyone is talking about this obvious leisure recovery but very few investors have sufficient exposure to benefit from it.

Investing in the most relevant, admired brands serving the services sector has never been easier.

1The ISM Report On Business (ROB), also known as the ISM Report, is the collective name for two monthly reports, the Manufacturing ISM Report On Business and the Non-Manufacturing ISM Report On Business, published by Institute for Supply Management.

Disclosure:
This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof.  Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein.   Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

For all things Alpha Brands please visit globalbrandsmatter.com

---

Dynamic Brands Blog - Updated Bi-Weekly

For more insight into consumer trends, market outlook and portfolio positioning I share my thoughts bi-weekly on my blog!

Bloomberg Interview: Markets, Portfolio, Brand Positioning

Click the link for the quick interview & update

DISCLOSURE:

This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof.  Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein.  There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed.  Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.