Consumer discretionary sector in focus

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There are 11 stocks in the Consumer Discretionary sector of the ASX 100 – which are all listed in the Table. Five are stocks associated with gambling (TTS, CWN, EGP, TAH, ALL), three are retail store chains (MYR, DJS, HVN) and two are media (NWS, FXJ). The remaining stock is Flight Centre. News Corp dominates in size, being 41.2% of the sectors market capitalisation in the ASX 200.

I sold out of this sector in May 2011, having been burned a couple of times in HVN and I have not returned since. I exited NWS quite some time before. However, Consumer Discretionary has been one of the standout sectors for the year – but it was coming from a low base.

I’m not against gambling – as many ‘ethical investors’ are. My problem is that these stocks can be very much affected by changes in regulation, which might not be flagged in advance. Media companies are going through a major transition, given the impact of the internet on the manner in which consumers take delivery of content – and how to charge for it. Need I say more about retail stores? Australians have changed their savings habits and the internet is also impacting this sector.

My views are largely reflected in concenus recommendations. Only three pass my 2.5 rule (please see my paper on this on www.woodhall.com.au under the Market Update tab). They are NWS, CWN and FLT.

Turning to Chart 1, I note that FLTs recommendation, while being very good, has been slipping for 12 months – but it did improve in the last two days. I’d monitor this recommendation a little while longer before I’d consider buying (please see chart at the end of this article).

The NWS was also very good until the second half of last year. But again, it did improve in the last couple of days.

CWN has the best recommendation but it too has slipped a bit. This looks to be the best of the bunch on recommendations alone.

FLTs price is above its median target price and CWN is on it. NWS has room for capital gains based on the median price. All three have had massive growth in the last 12 months: NWS (40%), CWN (38%), FLT (63%).

The exuberance chart shows the current drama. Mispricing is currently 4.8%, which is not far below our ‘trigger point’ of 6% for a correction. The ASX 200 has just been through seven consecutive weeks of gains. This sector is all looking a bit much to me (please see chart at the end of this article).

The only stock that interests me in this sector is Flight Centre but today doesn’t seem to be the best time to buy – at least according to broker forecasts of target prices, our measure of exuberance, and the strength of the trend. If we look back to my last two papers – both on the materials sectors, most of the stocks have so far done quite well – and that’s consistent with my way of analysing stocks and sectors as I discuss in that paper on our website.

Ron Bewley is the Executive Director of Woodhall Investment Research.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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