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Pro Analysis

Santoli: Unloved consumer plays ready for comeback

Gap store
Kuni Takahashi | Bloomberg | Getty Images

For years, "Never bet against the American consumer" was both an undisputed cliché and a six-word investing strategy. Until the past year or so, that is, when betting against stocks dependent on the U.S. consumer became both a consensus stance and a profitable trade.

The consumer discretionary sector has been relatively weak within a sturdy stock market, up 2 percent year to date against 5.4 percent for the S&P 500. Pure retail stocks have been even weaker, with Amazon.com's stunning advance carrying the sector. Big Auto stocks peaked a year and a half ago, as did leading consumer-finance plays.

SPDR S&P Retail ETF vs. S&P 500

Yet a few stray headlines and intriguing stock moves last week could be hinting that it's time for contrarian investors to begin hunting for comeback stocks within the Main Street economy.

Friday's employment report for September showed slightly fewer net new jobs than forecast, a mild disappointment. But payroll growth remained in its steady trend, more people began looking for work, wage growth of 2.6 percent from a year earlier has nosed ahead of the inflation rate, unemployment claims remain at four-decade lows and job openings at a record level. The job market is firm and getting steadily better, in other words.

Later on Friday, the Federal Reserve consumer-credit release showed borrowing grew at an 8.5 percent annualized rate in August, the fastest in a year, with student, auto and revolving balances all rising. Greater willingness to borrow with consumer balance sheets in decent shape is a sign of confidence about future incomes.

Then there were a couple of eye-catching stock reactions: Shares of the big U.S. car manufacturers Ford Motor and General Motors both perked up in a down market early last week on mediocre auto-sales figures for September.

Similarly, Gap shares popped 15 percent Friday after reporting comparable-store sales that fell about three percent, but according to the company would have been flat if not for a large fire at a distribution center. The key here is not the details of the report, but the fact that the stock was cheap and unloved enough to roar higher on an ambiguous interim sales report ahead of the holiday season.

Without drawing grandiose conclusions, this is the sort of action we might see in stocks that have already priced in tough fundamental challenges and can rally on any evidence that consumer-spending is not falling apart.

Technical analysts have been generally negative on most retail and auto shares for months given nasty downtrends, but last week Renaissance Macro's Jeff de Graaf said GM and other auto-related stocks were starting to appear washed out and perhaps bottoming. Bespoke Investment Group also notes the consumer discretionary group has quietly outperformed the broad market since the Sept. 21 Federal Reserve meeting, when expectations firmed up for a slow rate-raising cycle resuming late this year.

Maybe this leaves domestically-geared consumer stocks where many globally-exposed cyclical names were late last year: Badly underperforming and out-of-favor, pricing in an "industrial recession," with many investors inferring a scary message for the broader economy that never quite was realized.

If so, then it might make sense to sift for stocks with a profile like that of many industrials that have since come roaring back: Unloved by the Street, with depressed valuations and at least some inkling in the charts that their downward momentum has waned.