Walter Stackow is an experienced consumer analyst at Oak Ridge Investments covering companies across many consumer industries. Years of meeting with company management and following economic, consumer and demographic data, has added to Walter’s remarkable, in-depth fundamental view of the sector. We spoke to him about the sector’s most interesting data, current state of the consumer, forward-looking trends and a few surprising investment perspectives.
The economy sees regular fluctuations in consumer spending. What are some major factors affecting this spending?
Consumers can increase spending in two ways - borrowing more money, or through income growth. In the aftermath of the 2008 financial crisis, we’ve seen a “smarter” US consumer that is more disciplined with the use of debt, as measured by debt burden statistics. Therefore, it’s more likely to assume the consumer will continue to be more disciplined in its use of debt to finance spending. As for wage growth, while it is presently running at the highest pace of the current economic cycle, I think one should be cautious on assuming it will continue to accelerate. Businesses, consumers’ employers, are expected to see slower revenue and profit growth potentially restraining the consumer’s wage growth. As such, consumer spending will likely remain in its present low growth range at least for the foreseeable future.
Why has U.S. economic growth broadly matched consumer spending growth?
The consumer economy, direct spending by households, is about 70% of GDP. This has been relatively consistent over the past decade, and as such, are focused on opportunities within the sector as opposed to banking on a substantially increased share of GDP. Secondarily, this 70% may also have a higher influence on GDP in the form of private domestic investment in business when consumers increase demand. For example, if consumer demand for cars rises, more factories are needed to build cars, steel production is higher and intellectual property grows. Overall, the consumer is the key driver of U.S. GDP, the rate of spending more or less mirrors total GDP trends.
The sector is such a large area for investments. How would an investor direct their attention in the consumer space?
There are a few key themes and trends that tend to influence our bottom-up stock picking. For example, we focus on businesses that have limited vulnerability to the threat of eCommerce. On the flipside, we are interested in businesses that benefit from technology. We are also big believers in what the industry terms “big data”, and we focus on those companies that can best leverage data to differentiate themselves and drive growth. Other factors include demographics, population aging and on companies that can benefit from serving the Millennial generation.