Home Improvements

Sometimes I think that the best strategy for improving one's home is just to get away from the place for a while. The more time you spend at home, the more you are going to notice that bathroom that needs remodeling or those kitchen cabinets that need to be upgraded. And maybe this just isn't a good time to have your kitchen or your bathroom--or your wallet--torn up, so you live with it, even as those flaws hold your attention like a piece of old spinach stuck in the teeth of your dinner companion. If you plan your escape, you might realize the benefits of an "out of sight, out of mind" experience, and, upon your return, you might gain a new appreciation for your familiar environs, imperfections and all.

Getting away is exactly what my wife and I did back in January, when we spent an extended weekend at the Alluvian Hotel and Spa in Greenwood, Mississippi. If you're not familiar with the place and think a small town in the Mississippi Delta seems an odd location for a destination vacation, I'll point out that the Alluvian is owned by the Viking Corporation, the maker of high-end kitchen equipment, which has its headquarters right there in Greenwood. When I was conducting a little research for our trip, I learned that Viking was being bought by Middleby Corporation (MIDD, $181). Mibbleby is not a household name, because the stuff they make is not likely to turn up in your household. The company is a leading manufacturer of commercial kitchen equipment, and the Viking purchase gives the company a new presence in the residential market. Owing, at least in part, to the company's visionary CEO, Selim Bassoul, Middleby's stock is up some 280% over the past five years (gaining 80% over the last year alone). With a market capitalization of $3.4 billion, MIDD is a "mid-cap" stock that has probably escaped the attention of many investors. I have only rarely heard it mentioned by the talking heads on CNBC, a lack of attention that I take as a big plus.

My fanciful concept of home improvement aside, what literal home remodeling and vacations have in common is that they are both forms of what economists call consumer discretionary spending, aptly named because such expenditures can typically be postponed. This part of the economy stands in contrast to the consumer staples sector, which is characterized by continued buying of consumables such as food and household products. Pampers diapers and Tide laundry detergent from Proctor and Gamble (PG, $80) will probably still find their way into consumers' shopping carts regardless of the state of the economy, as will Raisin Bran and Corn Flakes from Kellogg (K, $67). It is worth noting, though, that some of these staples stocks have done quite well of late, with PG up 23% and K up 41% over the past year. Some market observers think such strength in a recovering economy is unusual (investors tend to favor such stocks in a faltering economy), but one explanation may be that it is this sector that has historically offered good dividend yields, with dividends that are both reliable and growing. Faced with the meager yields in the bond market, investors have bid up the prices of these stocks as an alternative source of income. With the higher stock prices, the dividend yields are lower now than they were a year ago, with PG now yielding 2.99% and K 2.75%; that's still better than the 2.57% yield on 10-year Treasuries.

Mr. Bernanke and the Fed have pushed interest rates to historic lows to encourage all sorts of spending, but there's no guarantee that this will work. John Maynard Keynes once noted that stimulative monetary policy could be like "pushing on a string," but I prefer to think of it as a classic example of the "leading a horse to water" problem. No matter how low interest rates may be, you're not likely to borrow money to start adding on to your home if you think you may be out of a job in six months. The cavalry riding to the economy's rescue here may be the wealth effect, the tendency of people to spend more if their investment portfolios are rising in value. This doesn't mean that people are cashing in their stock gains to fund increased expenditures directly--it just means that people are more willing to rev up the Visa card for that trip to Disney World if they've got a higher net worth to back them up. An increase in portfolio value from $500,000 to $600,000 (+20%) is a pretty powerful enticement to spend, even if you're not tapping a single penny of that money. This cavalry, though, is quite a few horses short of a full battalion because not everyone is fortunate enough to own stocks. The stagnant wage growth that has characterized the economy for some years now might lead some to think that the approaching cavalry is actually the Horsemen of the Apocalypse, delivering yet another reminder of what we have considered here many times as our "Tale of Two Cities" economy. That's one reason why a middle-market retailer like J.C. Penney (JCP, $16.50) has seen its customers move to the lower-end discounters. If you pay a visit to discount retailer T.J. Maxx (TJX, $52), you might just encounter part of the J.C. Penney diaspora browsing the clothing racks. Accordingly, we would expect any boost in consumer discretionary spending to be skewed to the higher end. As Willie Sutton supposedly said when asked why he robbed banks: "That's where the money is."

A measure of cynicism about the economy's lethargic pace is certainly understandable, but the fact is that things are at least moving in the right direction. The Federal Reserve would not be signaling a potential tapering of its bond-buying stimulus if its radar array of economic models and statistics weren't picking up a glimmer of something on the horizon--maybe those AWOL cavalry members. And we can say right now that the consumer sentiment and confidence numbers have been encouraging. Another plus is the housing sector, which now seems firmly on the mend after the bruising it took in the recession. What's important to remember is that investing is all about the future, and the market anticipates and discounts what conditions are likely to be some time hence. It may seem like a gloomy disconnect that stocks rally amid the sluggishness in the economy, but that's actually good news--or at least the market strength presages better news. The arrows, for the most part, are pointing in the right direction.


The consumer discretionary part of the economy includes a number of sub-sectors--apparel, restaurants, hotels, and automobiles, to name a few. Probably no company covers as much of the waterfront here as Visa (V, $192), because they collect a toll every time someone swipes of one their credit or debit cards. Last week Visa reported earnings and sales numbers that beat expectations, and the company offered upbeat guidance for the rest of the year. The stock, which traded at a new 52-week high of $196 after the report, is up about 48% over the past year. If we are looking to this sector for stock ideas, we have to find companies that have something going for them other than just being positioned to benefit from the trend of increased spending. If the overall pie is growing slowly, then our companies need to be able to take a bigger slice of that pie. The other part of the Visa story, what we see as the secular or longer-term trend, derives from the fact that a majority of the world's transactions are still paid for with cash. That may seem surprising when the person in front of you at the convenience store pulls out his Visa debit card to pay for a $6.00 pack of Marlboro, but we're really looking at the global situation here. That gives Visa a pretty long growth runway, over and above how it will benefit from a cyclical recovery in spending.

In the retail apparel sector, we might take a look at Urban Outfitters (URBN, $42), the trendy clothing store aimed at the younger demographic. Personally, I'll have to say that whenever I see a group of women dressed in these clothes, I am tempted to ask them if they are auditioning for roles as extras in the next production of Les Miserables. However, I learned a long time ago not to let my fashion taste influence my investment decisions (and Brooks Brothers isn't a publicly-traded company). The company also owns Anthropologie and Free People, both with plenty of room for more locations both domestically and internationally. It's not just about locations here, though, because, unlike some other bricks-and-mortar retailers that have suffered from the juggernaut of online shopping, URBN seems to have leveraged its online presence to its advantage. You might want to get in touch with your inner hipster and conduct more research--nose piercing not required. Also hitting a new 52-week high after a stellar earnings report last week was Starbucks (SBUX, $72). The company is not content to rest on its laurels and merely welcome back the customers who once again are ready to pay $5.00 for a latte. They have plans for a greater variety of food and drink items, designed to get people in their locations beyond the peak latte-sipping hours. CarMax (KMX, $48) is a specialty retailer I find interesting, with its hassle-free and haggle-free approach to buying and selling cars. If you were in the market for a "previously-owned" vehicle, you'd probably find yourself spending a great deal of time perusing the locally-owned used car lots, each of which may not offer much of a selection. There you might encounter a salesman who wants to "friend" your daughter on Facebook with the idea of taking her out for a gourmet dinner at Applebee's and a test drive in his 1975 Eldorado with a cooler full of Pabst Blue Ribbon tall boys. KMX just might spare you that nightmare.

As we wrap this up we'll take another look at Middleby, and note that the calculus for buying a piece of commercial kitchen equipment is different from the considerations involved in selecting a residential stove or oven. While MIDD is not in the consumer discretionary sector, the connection is that the demand for its products is a derived demand--derived, that is, from the consumer demand for eating out. Restaurants don't buy new ovens to impress the neighbors, but to better and more efficiently serve their clientele. That means cooking food faster and keeping it at the right temperature until it is served, and this is where Middleby's investments and innovations have paid off for both its customers and its shareholders. Maybe its purchase of Viking is not a game-changer, but it keeps MIDD on the growth path with a new market.

In the lobby of the spa building at the Alluvian sits a gleaming, stainless steel Viking cooking machine the size of a Chevy Suburban. This beauty was tempting, but about six months before our trip to the Alluvian, my wife and I did replace our 25-year old stove top, and in the interest of full disclosure I'll tell you that we bought the Wolf brand. They had just come out with a modular stove top that better suited our needs and our counter space. We selected four gas burners, a grill, and a steamer. I wanted the deep fryer instead of the steamer, but my wife said no way was I going to turn our kitchen into a grease-soaked chamber of horrors. So, we're currently in the market for a Fry Daddy. As the wife says, "Take it outside!"

Life is short. Get busy.

Jim

Disclosure/Disclaimer: My family members and/or I own shares of MIDD, PG, K, TJX, V, URBN, SBUX, and KMX. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as the advice to buy or sell any security.