American consumers may finally be participating in the U.S. economic recovery, six years after the official end of the Great Recession. Recent data shows we may have turned a corner:
- The U.S. economy added almost 3 million jobs in 2014 (the most in 15 years);1
- Gasoline prices have fallen by a third over the past year;2 and
- U.S. consumer confidence in February hit its highest level since 2004.3
These improving data points have translated into an increased willingness to go out and spend. Consumer spending rose 4.3{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} in the fourth quarter of 2014, the best growth rate since the first quarter of 2006.4
Driving Equity Returns
The revival of the U.S. consumer is likely to be an important driver of equity returns in 2015. We believe that several of the holdings in our Discovery Mid Cap Growth Fund are well positioned to benefit from that revival as consumer spending and confidence in the U.S. economy continue to rise. These include companies such as:
Dollar Tree, the nation’s third-largest value retailer and largest chain using a single $1 price point. As you might expect, its clientele is primarily on the lower end of the consumer spectrum. However, every additional dollar in the pockets of these customers, whether through a new job or money saved on gasoline costs, is a dollar that is likely to be spent. In our opinion, this means Dollar Tree should disproportionately benefit from an improving consumer environment. The company recently posted strong comps and its integration of a recently acquired competitor, Family Dollar, could be accretive to shareholders.
L Brands, the retailer best known for its Victoria’s Secret and Bath & Body Works brands. We believe the market leadership of these premium brands puts the company in a great position to benefit from increasing consumer spending. L Brands recently reported accelerating comps and strong earnings growth through the holiday season, along with impressive gross margins and improvements in inventory management. Management has a proven history of executing well. We believe in their ability to carry out plans to increase market presence in North America, while simultaneously expanding internationally. Current international operations only account for about 10{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} of sales, so the largely untapped overseas market represents what we see as an exciting greenfield growth opportunity.
VCA, the largest veterinary care provider in the U.S. The company’s growth has been anemic in recent years, as financially strained consumers cut back spending on their pets. This trend has recently reversed. Pet owners seem to be using some of their newfound discretionary income to provide a higher level of care for their animals. Unlike the human healthcare market, in which insurance companies with hefty negotiating clout make the majority of payments, consumers pay virtually 100{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} of the cost of their pets’ healthcare. This results in much lower bad debt expense, compared with human hospitals. More discretionary income for pet owners has translated into increased spending on pet preventative care. Consumers are more willing to shell out for specialized medical procedures for their pets than they have been in the recent past.
After six long years of flat wage growth and a weak job market, U.S. consumers may finally be starting to feel the effects of the economic recovery.
We believe selective exposure to high quality growth companies exposed to U.S. consumer spending will be beneficial to investors’ portfolios in 2015.
- FactSet (as of Dec. 31, 2014).
- U.S. Department of Energy (as of March 30, 2015).
- University of Michigan Survey of Consumers (as of Feb. 28, 2015).
- Reuters, “U.S. Economy Cools in Fourth Quarter, but Consumer Spending Shines,” Jan. 30, 2015 (https://www.reuters.com/article/2015/01/30/us-usa-economy-idUSKBN0L30BC20150130). By clicking on the link, you may be leaving our website and entering an external website. OppenheimerFunds and its affiliates are not responsible for the content posted on third party websites.
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