2 Ways to Profit on Consumer Chaos

People seem to be spending less than they were a few years ago, says Chris Versace, who shares a pair of companies that should see more business in this climate.

We’ve heard a lot of talk about the cash-strapped consumer lately. We’re talking about that today with our guest, Chris Versace. Chris, what does that mean exactly, that people don’t have as much money to spend?

Well, we think of what’s going on in the environment over the last few quarters, Kate. We’ve had record unemployment, over 8% for a persistently long time. We look at wages, they’re not growing over time. So, we look at that and we say that the amount of disposable income that the consumer has is very, very tight.

What’s happening? Their costs are inflating. We look at the return of the rise in gas prices. We look at the impact of the drought that we’ve seen in the Midwest and what’s going on with corn and soybeans. The ripple effect is food prices will be going higher in the back half of the year and into 2013. The consumer is going to continue to be strapped.

So, the question for us becomes who benefits, who gets left behind with this cash-strapped consumer power trend. For us, we think that some victims will be some of the casual dining restaurants, like a Darden (DRI), like a Red Robin (RRGB). They’re going to get hit by higher commodity costs and a consumer base that doesn’t have the money to spend. So, we’d be avoiding names like that.

In terms of who benefits, we see the return of the consumer eating at home. So, there are a couple of ways to play that. Some people would say, well, supermarkets will stand to benefit, like a Safeway (SWY), for example.

I, on the other hand, prefer a company like McCormick (MKC) for a couple of different reasons. They continue to expand their geographic base, expanding over in Asia. They’re doing a phenomenal job of cost rationalization with their facilities. More importantly in these turbulent times, they continue to increase their dividends, something they’ve done for over twenty years.

So, it’s a low-beta name, very stable, fantastic, and best of all we’re heading into the seasonally strong part of the year for them given the holiday season, and that’s a six-month window. Think about it. You’ve got Halloween, Thanksgiving, Christmas, New Years, and then you roll into Easter, which is big in Europe. So, McCormick is well-positioned.

Chris, you mentioned commodity input costs. Are any of the food producers going to be affected by this? I imagine they are.

They will be, because obviously food—those inputs are one of their higher costs in terms of percentage of cost of goods sales. So, any rise in that is going to impact their margins and their overall cost structure, and impact earnings.

So, we want to avoid those companies that are going to see that spike in input costs. Companies like a Tyson (TSN), for example. Companies like a Hormel Foods (HRL). A company like a Hillshire Farms (HSH). Those are the ones that we would be moving away from.

Okay, well great information today. Thank you so much.