My finance view

After a modest spring comeback for consumer stocks, there’s a reluctance to make any big new bets on the resilience of the American consumer, according to some fund managers with strong recent track records.

Many managers are trimming their consumer stock holdings, believing any broad U.S. recovery will be driven by business spending, with consumers staying on the sidelines and away from malls and restaurants. This recession has been so far-reaching and has changed spending habits so fundamentally that the tight grip we’ve had on our wallets may not loosen anytime soon.

"The American consumer that the global economy loved for the last few decades is going to be substantially different for at least the next five years, and maybe even longer," said Randall Greer, manager of the First Focus Core Equity Fund.

Greer’s large-value category fund holds less than 6 percent of its $81 million in assets in consumer discretionary stocks, below that category’s nearly 9 percent weighting in the fund’s S&P 500’s benchmark. With its modest consumer holdings, the fund has posted a 4 percent year-to-date return, outpacing the S&P 500 and the average large-value fund.

Greer and other consumer comeback pessimists weren’t surprised this week when the Consumer Confidence Index showed a June drop that most analysts hadn’t expected. The index had been rising steadily from a historic low in February. But after June’s decline, it remains well below a level that’s considered healthy.

Despite consumers’ continuing anxiety and slow retail sales, consumer stocks have recently revived. Consumer goods stocks rose nearly 23 percent in the second quarter, and consumer services stocks were up nearly 20 percent, according to Morningstar. That compares with a 15 percent jump in the S&P 500.

Some say retailers face a long road back to profitability.

Absent inflation — now around zero — this recession has virtually all the elements needed to induce pain in the pocketbook. Unemployment is at a 26-year high approaching 10 percent, leaving even those with jobs afraid and spending-averse. Plunging markets have eroded retirement nest eggs. The housing slump has deprived Americans of much of the home equity that they had relied on coming out of the 2001 recession, when home prices held up despite troubles across the rest of the economy.

Consumer debt remains high, and most forms of credit are still pricey and hard to come by. And although $4-a-gallon gas hasn’t set in this year, fuel prices have lately been on the rise, with last year’s spike still a fresh memory.

Americans have responded by taking the uncharacteristic step of saving, which doesn’t help consumer-dependent retailers and restaurants first cash advance. The personal savings rate now stands at a 15-year high of 6.9 percent. The latest monthly jump marked a sharp turn toward frugality after annual savings rates had been below 1 percent from 2005 through 2007.

Ron Muhlenkamp figures the trend is long-term, and is keeping less than his usual consumer stock weighting in his $621 million Muhlenkamp Fund.

"My suspicion is that now that people have cut back, they’re finding out their new spending level isn’t all that bad, and they might just stay there," said Muhlenkamp, whose large-value fund has rebounded from underperformance the past three years to an 8 percent return year-to-date, topping the S&P 500, which is now almost exactly where it started the year.

The consumer stocks that Muhlenkamp, Greer and Turner Investment Partners’ Jason Schrotberger are sticking with these days are uniquely positioned to survive the recession, the managers say.

Greer likes stocks such as Procter & Gamble Co. and Pepsico Inc. with large international markets. He figures growing middle-class populations in countries such as Brazil and India offer more opportunity than the U.S. market.

Schrotberger, who covers consumer stocks at Turner and co-manages some of the firm’s funds, is focusing on retailers such as department store operator Kohl’s Corp. that began cutting costs and inventory soon after signs of an economic slowdown emerged, rather than waiting.

"Those companies will be able to come out of this stronger, with more market share," Schrotberger said.

And Kohl’s, the No. 5 overall holding at Turner’s family of funds, has traded around $42 recently — about the same price the stock was a year ago, before last fall’s market swoon.

As for Muhlenkamp, his favorite consumer pick is Goodyear Tire & Rubber Co., whose shares are down sharply from a couple years ago, but have tripled from an early March low of $3.17 to about $11.50 a share now.

Muhlenkamp notes that tire manufacturers make a bigger profit from selling replacements than from tires that come on new cars. And consumers these days are more likely to buy replacement tires for an old car than they are to get a new car.

"People," Muhlenkamp says, "will be cautious spenders for quite a while."

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