This column was originally published on RealMoney on Feb. 8 at 1:07 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
When the government reported last week that our personal savings rate turned negative for the first time in decades, you knew what was coming next.
It was just a matter of time before the worrywarts would jump on the numbers as proof that economic growth is in for trouble because Americans are now "living beyond their means."
Actor and economist Ben Stein was among the first to take the bait. In a Yahoo! column chastising Americans for not putting away enough for retirement, Stein cited the negative savings rate as evidence that we are "living from paycheck to paycheck -- and barely getting by at that."
The New York Times
joined in, warning that we should all be alarmed by the turn of events.
But are we really dipping into our savings for the first time since the Great Depression to keep spending?
Not at all.
What's more, solid job growth and decent wage gains suggest the consumer will continue to be just fine. So don't dump those retail stocks just yet.
In fact, several retail stocks look like buys. On the value side,
American Eagle Outfitters
are attractive, and
Bakers Footwear Group
look interesting as momentum plays.
Why the Numbers Mislead
Why all the confusion about the savings rate?
There are several quirks in how the government tallies the personal savings rate, says Ed Yardeni, an economist and chief investment strategist at Oak Associates. Here are the main culprits.
The definition of "income" excludes capital gains.
This creates a huge distortion in the savings picture. After all, many people are selling their homes to downsize as they retire, or as their children move away. Many people are also sinking a great deal of their savings into stocks.
But their capital gains aren't considered income. Any part of those gains that they shell out, however,
counted as spending. So assuming nothing else changes, if they spend any of their capital gains, their savings as a portion of income goes down, according to the government.
The amount of income missed by the government is big these days, because home values have appreciated so much.
This, of course, concerns the worrywarts as well. As housing markets cool off, won't that eliminate this source of "income"? Not really. Home prices have gone up so much that there are a lot of capital gains left to tap as income.
The value of residential real estate rose to a record $19.1 trillion in the third quarter of last year, says Yardeni. That was $2.4 trillion higher than a year ago, and $7.9 trillion more than five years ago. Yet during the third quarter, the value of existing-home sales was $1.7 trillion (at an annualized rate). That was only 8.8% of the value of all homes.
"Even if the pace of existing-home sales slows and home prices go flat, there will still be plenty of capital gains for sellers," says Yardeni. "Prices would have to fall significantly to wipe out the appreciation of existing homes over the past several years."
The government doesn't count retirement pay as personal income.
But people spend it. This makes our spending look a lot higher than it really is, relative to income.
A big chunk of our retirement savings goes uncounted.
Katie Benner points out, savings vehicles such as individual retirement and 401(k) accounts
"When I do my slice and dice to try to figure out whether consumers are living beyond their means, I don't come up with too much to worry about," says Yardeni. "The idea that Americans are living beyond their means is just wrong."
If you have any doubts, consider this: Net worth is at record levels -- not declining -- at over $49.5 trillion.
Consumer Strength Will Continue
Besides a decent savings rate, other factors point to continued consumer strength ahead, despite what the worrywarts want you to believe. "The consumer is in good shape," Yardeni says.
Employment is solid. The January employment report showed a sharp drop in the unemployment rate to 4.7% from 4.9%, a four-and-a-half year low.
Annual wage gains are healthy -- an annualized increase of over 3% was reported for December.
Higher energy costs don't look like much of a threat -- except maybe to retailers catering to people on a tight budget. The reason: Even with higher energy costs, we spend only 5.8% of our disposable income on energy.
So what's the best way to play continued consumer strength?
Two Value Plays
On the value side, I'd go with two names from John Buckingham, manager of the
Al Frank Fund
(VALUX) and editor of the
. His fund has annualized gains of 17% over the past five years, and his newsletter's model portfolio is up about 20% a year, on average, over the past two decades or so.
Buckingham likes Home Depot because it has solid financial strength and decent prospects, yet the stock is cheap. At $39, Home Depot trades for 15 times trailing 12-month earnings and one-time sales. That's well below the average over the last five years. During that time, it has had an average trailing P/E of 21.6 and a price-to-sales ratio of 1.5.
Buckingham believes the housing market will stay strong and support enough growth to push Home Depot back up toward prior valuations. The company is also moving into new lines of business such as providing customers with contractors and selling supplies to homebuilders and contractors.
American Eagle Outfitters hasn't been growing as consistently as competitors such as
Abercrombie & Fitch
, and that has investors bailing out of the stock. They've sold it down to just over 12 times forward earnings. But the valuation is even lower when you consider that American Eagle has $3.50 per share in cash.
Buckingham figures that given its track record, American Eagle Outfitters will get the fashions right sooner or later. "It will grow in the long run, and you can buy that growth now at a pretty good discount," he says.
Two Growth Names
For growth, I'll go with two picks from Jim Collins, a money manager who publishes
. Not only does Collins have great annualized gains of around 20% over the past 15 years, his
model portfolios were up 16.7% in January alone.
Collins added Bakers Footwear Group to his buy list last month. A mall-based retailer that sells moderately priced footwear to young women, Bakers Footwear is both a growth story and a turnaround. It's adding about 30 to 35 stores a year on a current base of 237 stores. But it's also giving old stores a makeover -- and those boost sales. Sales at stores open more than a year were up 17% in the last year.
"Even if we didn't expand at all, our company would grow anyway from this remodeling," says Chairman and Chief Executive Peter Edison. Analysts are looking for sales growth in the 15% to 20% range and earnings per share growth of about 20% to 30% in the medium term. Yet the stock has a forward P/E of 18 and a price-to-sales ratio of 0.7.
Bakers Footwear -- which also operates stores called Wild Pair -- is about halfway through its remodeling program. Sidoti & Company analyst Heather Boksen thinks Bakers will ultimately expand to operate 600 stores.
The women's retailer Dress Barn is on a tear, posting 16% sales gains in January at stores open more than a year. "They've done a good job of having the right merchandise," says Erin Moloney, an analyst with Merriman Curhan Ford & Co. So unlike many other retailers, Dress Barn didn't have to juice sales through extensive discounts during the holiday season.
Moloney expects healthy growth to continue. At $45.25 a share, Dress Barn trades for about 20 times forward earnings, compared to a medium-term projected earnings growth rate of 17.6, so you could argue that it's a tad pricy. Moloney thinks Dress Barn deserves a premium. But Collins would wait for the stock to retreat by a few dollars before buying. "The stock has a history of pulling back," he says.
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Brush is an award-winning New York-based financial writer. At the time of publication, Brush had no positions in any of the securities mentioned in this column, although positions may change at any time. In addition to writing for
, Brush has a weekly market column on
called Company Focus, and a column called Insiders Corner at InvestorIdeas.com. He has covered business and investing for
The New York Times
magazine and the Economist Group. He studied at Columbia Business School in the Knight-Bagehot Fellowship program and the Johns Hopkins School of Advanced International Studies. He is the author of
Lessons From the Front Line
, a book that offers insights on investing and the markets based on the experiences of professional money managers.
Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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