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1 Reason to Tread Carefully in This Sector

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Stocks tied to consumer spending have been huge winners lately. Thanks to elevated consumer confidence, folks are feeling optimistic and starting to open their wallets. But this news has investors wondering if good stock buys still exist in the consumer goods space.

Dissecting the sector
Just last month, The Conference Board reported that the Consumer Confidence Index hit a five-year high. The real estate recovery is under way, and the job market is slowly rebounding. Despite a payroll tax increase that took effect at the beginning of the year, consumers are loosening the purse strings and feeling good these days. In fact, consumer spending rose at the fastest pace in two years during the first quarter of this year. 

Consumer discretionary stocks, which span industries like autos, apparel, leisure, and media, enjoy more upside during a robust economy and typically outperform the overall market when the economy is purring. For example, from the March 2009 market doldrums to present, the consumer discretionary sector returned 282% versus 175% for S&P 500. So far this year, it's been the best-performing sector, returning nearly 26% versus the S&P 500's 20%. 

Yet investors are getting cautious. Last week, retail sales came in weaker than expected. Also, some of the biggest winners in the consumer discretionary sector are trading at rich valuations. Take Tesla (NASDAQ: TSLA  ) , a stock that's surged an incredible 262% year to date. Many investors feel its current forward price-to-earnings ratio of 136 is both frothy and completely unjustifiable.

Last week, my Foolish colleague Sean Williams both extolled the virtues of CEO Elon Musk's genius and broke down Tesla's crazy valuation. Without a doubt, Tesla has a lot going for it. Musk's commitment is unquestionable, Tesla's technology is game-changing, and the company recently posted a profit. But big competitors are gaining ground in the electric vehicle market. And the infrastructure needed to make electric vehicles a viable and prolific means of transportation is not only lacking, but also years from becoming reality.

Rev up or downshift in this sector?
With huge stock run-ups like Tesla's, some investors feel the gains in the sector are behind them. So should you stay out of the sector completely? In a word: no. Good buys still exist, though it might require a bit more work to find them.

For example, Disney (NYSE: DIS  ) appears to be a good buy. Its stock price is up a more modest 29% so far for the year, yet it boasts an enticing forward price-to-earnings ratio of 16. Disney enjoys a diversified stream of revenues and an ability to produce seemingly endless billion-dollar movie franchises. Its Pixar, Marvel, and Lucasfilm acquisitions are proving successful and generating assets that'll create value for decades to come. In addition, Disney's lucrative cable networks bring in roughly 45% of revenues and two-thirds of annual operating profit. 

Foolish takeaway
By developing a diversified strategy for adding all sectors to your portfolio, a portion of your portfolio will prevail regardless of what happens in the market. But when a specific sector is on a tear, it increases the importance of doing your homework to find high-quality companies with enticing growth prospects whose stocks trade at good values.

Solid companies selling at depressed prices have consistently helped generations of the world's most successful investors preserve capital, minimize risk, and achieve long-term, market-trampling returns. For one such company, read our free report: "The One REMARKABLE Stock to Own Now." Just click here to get started.

Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 24, 2013, at 10:34 AM, Oseo wrote:

    How often do you drive more than 250 miles in one day? Well, even now, that is how often you would even worry about the driving range of the model S. Even that worry is soon coming to an end. “Consumer discretionary stocks” is a very broad-stroke comment. Tesla, like a handful of other industry-revolutionizing companies, appeals to consumers and investors because of much more than having bigger wallets. See, folks don’t like to feel helpless. Up to now, there was no real choice in the matter of driving without trashing the environment at the same time. Tesla brought it to the table. People don’t want to open their wallets, they want to change the way they live. They want give their kids clean air. Tesla vehicles are uncompromising in both that respect, and in the in the respect of toe-to-toe performance against competitors. For the same amount of money, a reasonable person would buy a tesla because it beats all competitors, electric or not, in four key areas:

    1 - Driving experience - mind blowing


    2 - Uncompromising in that it does not trash the

    roads it drives on. Purely electric.

    3 - Retains its value. Is integrated to the

    exponentially increasing energy revolution and

    infrastructure. Look around, it's here. Gas-

    powered vehicles are depreciating. Electric

    vehicles are both the present and the future.

    Tesla beats all other electric vehicles by leaps

    and bounds.

    4 - It is not tied down to the conflict of interest of

    selling gas-engine cars for the vast majority of

    its profits, like other car manufacturers. It is not

    ossified in the gasoline-engine deals of

    yesterday. It has wide-open doors to keep

    accelerating the introduction and sales of more

    electric vehicle models.

    It’s a clean slate. It stands out from broad-stroke analysis of stocks.

    Investing in Tesla appeals not only to the desire to make profits, but in the fundamental need to have a place worth spending those profits on: clean air on the way to the shopping mall, clean beaches and water on vacations, silent air to think...

  • Report this Comment On July 24, 2013, at 10:37 AM, Oseo wrote:

    From the beginning, years ago when everyone thought Tesla was just going to be an exotic electric roadster, a group of folks were sold. 0-60 in 3.5 seconds. Since then, that group of investors has grown steadily: it is stable and strong because it holds on to its stock looking at the horizon. The model S is the first glimpse of that. That base of stability knows that new milestones are coming, both in the short and the long run, for the Tesla product. They have consistently over-delivered. Point is, there are fewer and fewer sellers, because it's understood that Tesla stock has a better chance of going up than otherwise. Saying it differently, you are more likely not to see it at today's prices again. The evidence to that effect is exponentially increasing demand, a rapidly increasing supply, and the plasticity of Tesla's new innovative process. Up to recently, analysts were talking about "volatility" in the stock. The "volatility" was based on a dwindling number of short-sellers and so on leaching off the committed new investors. So, the stock is more stable today than yesterday. There is no reason to not expect more and more waves of investors looking at the Tesla horizon. As new milestones are reached, more buyers will arrive, the price pressured upward. The stable base holding the stock today are confident in the prospects for the company. They tend to be your highly educated professionals that see how the product fits uniquely into a global demand. Thus, they are unlikely to sell in the short run. The value of the stock is tightly woven to a steady, rapid, increase in the value of the product. Your focus is very narrow - you talk about the stock without looking at the context of who is buying it, what massive void the product fulfills, the large distance it is ahead of competitors, and the new "awesomes" that come with the mix.

    It feels great to buy Tesla. That, by itself my friend, says a lot about where the stock is going. Remember apple, google, yahoo? Tesla has been in development for around 20 years. Its place in the world is the product of that investment. I'm sure that when you get in your luxury, gas-burning sedan or SUV, you'll be thinking about it.

  • Report this Comment On July 24, 2013, at 2:26 PM, jamesdan567 wrote:

    "With huge stock run-ups like Tesla's, some investors feel the gains in the sector are behind them. So should you stay out of the sector completely? In a word: no. Good buys still exist, though it might require a bit more work to find them."

    Some investors are smart enough to realize that there are 1 billion cars on the world's roads, and only about 100,000 of them are pure EV's. (0.01%)

    " a bit more work to find them?" Why would an investor invest in someone other than Tesla and Musk when they are obviously the best, the leaders and advancing rapidly into the space? one of the biggest mistakes people make is to sell too soon. 265% is a nice start but its not over yet by any measure.

  • Report this Comment On July 25, 2013, at 2:50 AM, jamesdan567 wrote:

    "And the infrastructure needed to make electric vehicles a viable and prolific means of transportation is not only lacking, but also years from becoming reality."

    How many years? 2? Its electricity, stupid author. The infrastructure needed is a 240V outlet.

    The author is plain and simple, an idiot, based on her words. And don't worry, since EV's require only 1/4 or less of the energy of the ICE vehicle, and normally charge at night when there is a huge excess of generating capacity, the road is clear. Or, do you want to have $3 of every $4 you spend on gas simply go out your exhaust pipe?

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