Analysis: U.S. stocks tied to optional consumer spending look expensive

Tue Nov 5, 2013 4:30pm EST
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By Caroline Valetkevitch

NEW YORK (Reuters) - Companies that sell consumer goods, such as electronics, cars and appliances, are leading the U.S. market in earnings and share gains, but high valuations and fund managers' big weightings in the sector pose major investment risks.

Valuations for the S&P consumer discretionary sector .SPLRCD, which is the best performing this year, have shot up to a level not seen since the end of 2009, when stocks started to rebound but earnings were still lagging as the recession caused by the financial crisis had just come to an end.

Much of the sector's sales growth is concentrated in a few areas of strength, such as carmakers, as well as companies benefiting from the pickup in home prices and changing media trends - companies such as Ford (F.N: Quote), Home Depot (HD.N: Quote), (AMZN.O: Quote), and Comcast (CMCSA.O: Quote).

Their strength may be masking signs that the sector is vulnerable to a pullback, especially if holiday sales are weak or interest rates climb next year, hurting consumer demand.

Investors have been piling into these stocks in recent years, particularly some of the biggest momentum names, like streaming video company Netflix (NFLX.O: Quote).

The sector is up 34 percent since the end of 2012, or roughly 36 percent including dividends, more than any other S&P sector. By comparison, the broad S&P 500 index .SPX is up almost 24 percent for the year.

Some investors may end up paying the price, said Dan Suzuki, equity strategist at Bank of America Merrill Lynch, which in August downgraded the sector to underweight.

"It's expensive and over-owned, and we think some of the fundamentals are going to get less supportive," he said. "The risk/reward is clearly to the downside for the sector."   Continued...

Traders work on the floor of the New York Stock Exchange, November 4, 2013. REUTERS/Brendan McDermid