Book Profits in Consumer Discretionary Stocks

NEW YORK (TheStreet) -- The consumer discretionary sector includes companies that offer goods and services like TV services, dining out, online purchases and home-improvement products that people buy only if they can afford them.

This morning we learned that retail sales in July were stronger than expected with a gain of 0.8%. Excluding autos, retail sales rose 0.8%, and, excluding autos and gasoline, they rose 0.9%, also better than expected. This will likely give consumer discretionary stocks a boost in today's trading.

Despite weak consumer confidence since the beginning of the "Great Credit Crunch" in late 2007, several stocks in this sector have set all-time highs or multi-year highs since May. As such, Investors should consider booking profits in some of these stocks.

My benchmark for the sector is the Consumer Discretionary Sector SPDR Fund ( XLY), which contains 81 stocks. I will be focusing on the top 17 stocks in the fund by index weighting, each of which is 2% or higher.

The consumer discretionary sector is undervalued by 1.3%, according to ValuEngine, which is as neutral as you can get based on fundamentals. XLY traded to an all-time high of $46.27 on May 1 after trading as low as $15.85 in March 2009, a gain of 191.9%, which is reason enough to consider booking profits.

The daily chart shows that XLY ($44.64) is positive with rising momentum (12x3x3 daily slow stochastic) reading with XLY above its 21-day, 50-day and 200-day simple moving averages at $43.92, $43.54 and $42.28, respectively. My semiannual and annual value levels lag at $39.91 and $36.46 with a weekly pivot at $44.60 and monthly and quarterly risky levels at $47.52 and $50.12.

Source: Thomson Reuters

The below table shows data from ValuEngine.com covering 17 of the 81 components of the XLY listed from top to bottom by percentage of index weight as of August 10.

Reading the Table

OV/UN Valued -- The stocks with a red number are undervalued by the percentage shown. Those with a black number are overvalued by that percentage, according to ValuEngine.

VE Rating -- A 1-Engine rating is a strong sell, a 2-Engine rating is a sell, a 3-Engine rating is a hold, a 4-Engine rating is a buy and a 5-Engine rating is a strong buy.

Last 12-Month Return (%) -- Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return -- Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Analysis of the Consumer Discretionary Sector

The overvalued and undervalued data for the top 17 components of the XLY shows that 11 are undervalued, with Ford Motor ( F) undervalued by 28.4% and Amazon.com ( AMZN) overvalued by 39.2%.

Home Depot ( HD) and News Corp. ( NWS) are the only two stocks in the table with a "5-Engine" strong buy rating, according to ValuEngine. There are two "3-Engine" hold rated stocks: Ford Motor and Nike ( NKE). The remainders are "4-Engine" hold rated.

Ford is the only stock of the 17 to trade lower over the past 12 months, with a loss of 13.8%. Home Depot was the biggest winner with a gain of 77.5%. Only Ford is expected to move sideways over the next 12 months. The stocks with the best-projected gains are the strong-buy rated Home Depot and News Corp.

P/E ratios are elevated for 11 of the 17, with a reading above 16 times forward 12-month earnings expectations.

Comcast ( CMCSA) ($34.55) traded to a new multi-year high at $35.60 on Aug. 7. My quarterly value level is $33.45 with a weekly pivot at $34.37 and a monthly risky level at $36.45. Investors should consider booking profits on this stock.

McDonalds ( MCD) ($87.90) traded to a new all-time high of $102.22 on Jan. 20. My semiannual value level is $86.46 with a weekly pivot at $88.52 and a monthly risky level at $93.55.

Disney ( DIS) ($49.86) traded to a new all-time high of $50.65 on Aug. 8. My semiannual value level is $48.76 with a weekly pivot at $50.64 and a monthly risky level at $52.54. Investors should consider booking profits on this stock.

Home Depot ($52.82) traded to a multi-year high of $54.28 on July 27. My quarterly value level is $48.35 with a weekly pivot at $53.03 and a quarterly risky level at $54.42.

Home Depot reported quarterly results before the market opened this morning that beat earnings-per-share estimates and raised its guidance for the full year above analyst expectations. Shares could find the strength to reach my quarterly risky level at $54.42, where investors should consider booking profits.

Lowe's ( LOW) ($26.55) traded to a multi-year high of $32.29 on April 16. My annual value level is $25.06 with a weekly pivot at $25.77 and a quarterly risky level at $30.71.

Nike ($95.85) traded to an all time high at $114.81 on May 2. My weekly value level is $86.30 with a semiannual pivot at $92.33 and a monthly risky level at $106.32. Nike reported weaker-than-expected earnings on June 29, citing higher expenses and a restructuring charge, and its shares fell to a low of $85.10 that day.

Amazon.com ($232.44) traded to an all-time high of $246.71 on Oct. 14. My monthly value level is $227.60 with a semiannual risky level at $236.23.

Priceline ( PCLN) ($562.00) traded to a multi-year high of $774.96 on April 10. My semiannual value level is $493.88 with a semiannual risky level at $615.29. On Aug. 7, Priceline gave a disappointing forecast for its third quarter that it blamed on the weak economy in Europe, and the stock traded as low as $553.43 on Aug. 9.

As of publication, the author had no positions in the stocks mentioned today, and no other conflicts.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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