Invest in what you know

Invest in the companies that seem to be doing best in key consumer spending categories

There is no better CORE portfolio than the Consumer Spending Core. Here’s proof:

BUILDING A PORTFOLIO CLIENTS UNDERSTAND & ARE PASSIONATE ABOUT.

THE KEY: BRAND RECOGNITION & DEDICATION TO THE IMPORTANT SPENDING CATEGORIES

I was doing an Advisor branch lunch presentation this week and the light bulb went on for this group of 25 Advisors.  It was such an ah-ha moment for them that a few came up to me after the presentation and asked if I would put the presentation in written format so they could use it with clients so please enjoy this week’s blog post.

The setup:

Questions #1:  What is the primary driver of U.S. economic prosperity? Consumers via their spending.

Question #2: Does that ever change? No.

Question #3:  Is that a U.S.-only phenomenon or is it prevalent outside the U.S.? It’s global, 60% of world GDP is household spending.

Question #4: Is predictability & stability a good thing? Yes indeed.

Question #5:  If the definition of “core” from the dictionary is “the most important part of something” does a consumer spending dedicated strategy offer a great core portfolio choice? Seems so.

Let’s see if the logic translates into attractive returns below.

35 KEY CONSUMER SPENDING & “TIME SPENT CATEGORIES” USING TODAY’S DOMAINANT BRANDS

It’s sad and exhilarating to go through your monthly bills at year end to see where you spent your money. There are the “staples of life” and the “discretionary purchases” and they roll up into our yearly spend.

Do that analysis for hundreds of millions of people in the U.S. and billions of people outside the U.S. and some great companies start rising to the top. These great companies that are dominating the important spending categories using the current trends we see, should in theory have been a pretty good group of stocks to own for a core portfolio over the last decade. To illustrated this, here’s 35 important spending categories and the dominant, highly relevant brand today based on our Brand Relevancy Scoring System (important: In categories where there were multiple brands dominating, I chose the one with at least a 10-year record of being a public company so there is some subjectivity involved):

1.    Cell phones & consumer technology - Apple

2.    Internet Search - Google

3.    Social Media - Facebook

4.    Coffee & Fast Casual - Starbucks

5.    Home Improvement Retail – Home Depot

6.    Athleisure Apparel – Lululemon

7.    Footwear & Apparel – Nike

8.    Fast Food – McDonald’s

9.    Video Streaming – Netflix

10.  Cosmetics & Beauty Supplies – Estee Lauder

11.  Credit Cards, Rewards Programs – America Express

12.  Warehouse Shopping – Costco

13.  Online Shopping & E-Commerce – Amazon

14.  Discount, Off-price Apparel – TJ Maxx

15.  Video Gaming Consoles, Personal Computing & Corporate Operating Systems – Microsoft

16.  Cable & Internet Service Providers – Comcast

17.  Healthy Fast Casual Restaurants – Chipotle

18.  Household Products like Toothpaste, Cleaning Supplies, Personal Care – Colgate-Palmolive

19.  Packaged Food Products, Chocolate – The Hershey Company

20.  Discount Retail Stores – Dollar General

21.  Soft Drinks – Coca-Cola

22.  Alcohol, Beer, and Wine – Constellation Brands

23.  Movies, Entertainment, Leisure Travel – Walt Disney

24.  Personal Healthcare & Baby Products – Johnson & Johnson

25.  Sustainable, Environmentally Friendly Auto’s – Tesla

26.  Everyday Personal Care Products – Proctor & Gamble

27.  Packaged Foods – Cereals and Quick Meals – General Mills

28.  Automotive Parts Retailing – O’Reilly Automotive

29.  Toys & Games – Hasbro

30.  Paint & Supplies – Sherwin Williams

31.  Managed Healthcare Providers – United Healthcare

32.  Packed Foods – Spices and Eat-at-Home Supplies – McCormick & Company

33.  Big-Box, Discount Retail – Walmart

34.  Cell Phone Service & Telecom Needs – Verizon

35.  Business & Leisure Hotel Stays - Marriot

Keep in mind, I did not even include some of today’s most important categories & Mega Brands like video Gamers, Visa, Mastercard, Banking with J.P. Morgan, E-Commerce platform winner Shopify, etc. I could easily have cherry-picked some of the most robust stock winners of the last 5+ years for the above analysis but I wanted this to be as real-world as possible. Importantly, there’s about 50% exposure to categories that offer more defensive qualities than offensive qualities so this isn’t even a complete bull-market, hindsight portfolio because in theory, I wouldn’t want to have 50% exposure in defensive equities if I knew with certainty I was investing in a raging bull market. The “staples of life” categories and brands have historically lagged in bull markets and thrived in economic slowdowns while offering stability in difficult markets as money flows to these “needs” categories.

10 YEAR LOOK-BACK

Understanding the inherent hind-sight bias in this exercise, this illustration is still highly valuable as a reminder that the spending we do as human beings can also offer a portfolio advantage when we track brand relevancy and are willing to own the brands that become the leaders as our purchase habits change over a lifetime. Here’s the characteristics of this hypothetical consumer spending brands model portfolio:

·       35% Consumer Cyclical exposure            

·       31% Consumer Defensive exposure

66% in traditional consumer stocks looks a lot like the 60% of world GDP data & 70% of U.S. GDP data we cite often. This allocation better tracks the real economy as a CORE portfolio when compared to the S&P 500 which is supposed to be the proxy investment for the economy. Let’s see if this approach can offer an edge over the S&P 500.

10 YEAR PERFORMANCE LOOK-BACK SOURCE (Powered by Ycharts)

 Below is the hypothetical, equal-weighted portfolio of the above leading brands serving 35 consumer spending categories. The performance chart below shows this static portfolio rebalanced annually back into the same 35 stocks.

Reminder, over time, brand relevancy will change most of these brands have largely been the dominant companies in their business categories for many decades.  The hypo portfolio above performed really well, not a big surprise given this is a consumer economy that’s out of recession more than in. But let’s see the portfolio metrics and risk metrics.

Not so bad. The 35 stock portfolio performed well and offered a seemingly smoother ride, likely because it’s about half filled with defensive type stocks. I call that having your cake and eating it too!

BOTTOM LINE:

·       Peter Lynch, the best mutual fund manager of our time focused on “invest in what you know”.

·       As consumers, we have unique insights into the brands that are dominating key spending categories because we are the dataset. This knowledge offers significant benefit for investing.

·       There can be no better hedge against our lifetime spending than to consider investing in the brands that control our wallet-share & mindshare.

·       In aggregate, we call these Mega Brands and they are a wonderful core portfolio option that tracks the real drivers of the domestic and global economies.

·       What brands do you spend consistent money on? What brands do you admire? Do you own the stocks in a meaningful way?

DISCLOSURE:
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.