$5 Gas to Spook Retail and Restaurant Stocks – It’s Called a Buying Opportunity

That background whine we’ve heard in retailer and restaurant earnings lately is the sound of high gasoline prices siphoning off business. And while it’s bound to grow louder as consumers fork out even more at the pumps this summer, investors should consider tuning it out. Better to listen for news about retail sales, the unemployment rate and other broad economic indicators. Because if these numbers continue to be as good as they have been lately, the stock market won’t care about $5 gas.

Focusing on the economy means defying the rather dated wisdom that tells investors to bail from casual diners, mall fashion and certain other discretionary spending dependents whenever the price of gas goes high enough to make headlines. A quick look at a couple of these companies pre-economic meltdown shows it’s a questionable strategy anyway. Darden Restaurants (DRI), still a favorite sell-off of the gasoline players, made some very good money for investors amid a few gas prices spikes five or six years ago. So did big box electronics seller Best Buy (BBY).

Boston Retail Price of Gasoline Chart

Boston Retail Price of Gasoline data by YCharts

Prior to 2008, the S&P 500 didn’t pay a great deal of attention to the price of gas, even though high gas hurts the profits of a lot more companies than those in the consumer sectors. (Everyone transports something.)

Boston Retail Price of Gasoline Chart

Boston Retail Price of Gasoline data by YCharts

To be sure, high gasoline prices really do cut into consumer company profits particularly deeply. More money in the tank simply means less fun dining and shopping for most Americans. The Cato Corp. (CATO), owner of lower-end fashion and accessory stores, has already complained. So has DineEquity (DIN), owner of inexpensive IHOP and Applebee’s restaurants. No doubt we’ll hear more of about it from their competitors in the months to come. Some companies in these consumer sectors have other issues for investors too. Cato is fighting higher cotton costs. Buffalo Wild Wings (BWLD) and Chipotle Mexican Grill (CMG) are trading at questionably high earnings valuations, Buffalo Wild Wings’ PE above 30, Chipotle’s PE above 60. And Best Buy is in such trouble with its big box costs and competition from Amazon.com (AMZN) that even $2 gas would hardly matter.

But notice that many of the so-called gas-sensitive stocks are up anyway. The Gap (GPS) topped analyst’ sales estimates recently, and its shares are up a whopping 40% plus this year. Buffalo Wild Wings are up more than 30%.

GPS Chart

GPS data by YCharts

That’s largely because a strong economy trumps high gas prices any day, and lately, the economic news has been pretty good. Consumer confidence in March hit its highest level in 12 months, and consumer spending is up 11.5% from a year earlier. Unemployment is down, and nonfarm payrolls are up.

US Unemployment Rate Chart

US Unemployment Rate data by YCharts

As more and more companies start using the phrase “due to higher gasoline prices” in their earnings reports – a refrain that’s sure to grow in popularity if gas prices do follow forecasts – shareholder urges to dump consumer stocks will probably grow too. When they do, it might be a good time to take a look at some of those restaurants and retailers. If the general economic recovery is as good as it seems, the market will hear all that noise about $5 gas as just a sad song on a really small violin.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings, stock screener and portfolio strategies.



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