* Upping the Retailing industry group to an Overweight stance and trimming Consumer Durables & Apparel to Underweight appears to have confused some investors given similar end market business drivers. The October 13th SIGN (Sector & Industry Group Navigator) report highlighted several changes in strategic stances including a divergence in the Consumer Discretionary sector with which clients have struggled since the shifts were perceived as contradictory. However, bottom-up analysis and constituency may be the key missing ingredients toward understanding the moves.
* The Retailing group's current market cap essentially is weighted to half ecommerce now versus traditional brick and mortar operators. For instance, the world's largest etailer accounts for more than a third of the S&P 500 industry group's constituency, while the best-known independent media streaming company comprises another 7%, and the biggest online travel company attains roughly 8%. Earnings estimate revision momentum also is supportive of a more positive view as are proprietary valuation metrics.
* The Durables & Apparel group is not as intriguing when considering falling revisions and unattractive valuation criteria. Homebuilders in particular look poised to underperform and pricing pressure remains for apparel due in part to distribution channel changes. In addition, share price momentum data and beta levels are different in this segment.
* Important business drivers such as more jobs and likely wage increases should sustain consumption activity not to mention greater wealth as net worth has climbed to new records, dragged higher by appreciating securities holdings plus a sharp recovery in home prices. Improving consumer fundamentals should not be construed as a "carte blanche" to buy everything that has exposure to some newfound purchasing power. Indeed, worry about Autos still seems appropriate beyond a near-term hurricane-related sales bounce.
* Consumer Staples have undergone substantive profitability weakening for 20 years as big box discounters began the trend that Internet retailers have jumped on more recently. The pressure of pricing has been in place for a good while and, at the same time, advertising expenditures to generate plus sustain brand awareness have continued on. Hence, lower relative valuation simply reflects poorer corporate profit margins.