Consumer Discretionary Sector

Consumer Discretionary Sector

February 2nd, 2010

Sekhar Achanta,Tongyu Zhou

Recommendation

• The Fund should underweight this sector when compared to S&P 500 index.• The Fund should rebalance the sector by selling some retail sector stocks.• We see 20% - 50% returns in some select industries in this sector.

• Automobile and components• Internet & Catalog Retail

• Major positives for this sector is improvement is Consumer Confidence.• Biggest risk - Unemployment.• We recommend that the Fund should rebalance by selling 300 basis points

of retail stocks in this sector and buy 300 basis points of automobile and components industry stocks and Internet and Catalog Retailing to keep the SIM weighting relative to the S&P500 at 6.99%.

S & P 500 Sector Weights (as of 1/27/2010)

Sector Current Index Weight

Current SIMWeight

Consumer Discretionary 10.15% 6.99%Consumer Staples 10.49% 11.66%Energy 10.88% 11.90%Financials 14.91% 11.37%Health Care 12.63% 14.30%Industrials 10.83% 12.36%Information Technology 19.41% 19.04%Materials 3.85% 3.46%Telecommunication Services 2.88% 3.27%Utilities 3.95% 2.94%

Consumer Discretionary - Sector Details

• The Consumer Discretionary Sector encompasses industries that tend to be the most sensitive to economic cycles.

• Consumer Discretionary Sector manufacturing segment includes automotive, household durable goods, textiles & apparel and leisure equipment.

• The services segment includes hotels, restaurants and other leisure facilities, media production and services, and consumer retailing and services.

• Sector Size - The Market cap of the sector is $28.6 billion in the S & P 500 index.

• The Total Market Cap of the sector is $2 Trillion.

Consumer Discretionary - Industries• There are 33 sub-industry indices in this sector, with Movies

& Entertainment being the largest, at 15.2% of the sector's market value.

• Industries in this sector– Auto Components– Automobiles– Distributors – Diversified Consumer Services– Hotels, Restaurants and Leisure– Household Durables– Internet & Catalog Retail– Media– Multiline Retail– Specialty Retail– Textiles, Apparel & Luxury Goods

• Source: http://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?tab=industries&sector=25

Consumer Discretionary Sector- Top 10 holdings

Source: https://www.spdrs.com/product/fund.seam?ticker=XLY

Sector Performance YTD and QTD

Consumer Discretionary Sector And Economic Cycles

Source: http://seekingalpha.com/article/178437-sector-performance-and-the-economic-cycle

Fed Stimulus –Fed Funds Rate

US Real GDP Growth

US Unemployment Numbers

Personal Savings Rate

Disposable Income

Consumer Confidence Index

Change In Consumption

Real Consumer Spending

Consumer Spending: Ex-Housing, Bills and Auto

Retail Sales

Consumer Discretionary –Same Store Sales

Correlation Coefficient R Consumer Spending Vs. Consumer Confidence

Correlation Coefficient R Consumer Spending Vs. Employment Rate

Correlation Coefficient R Consumer Spending Vs. Unemployment Rate

Correlation Coefficient R Consumer Spending Vs. CD Sector Performance

Consumer Discretionary Sector Revenues

Consumer Discretionary Sector Earnings Growth Rates

Consumer Discretionary Industries – Revenues and Earnings Growth Rates

Industry Revenue Growth (5 Year) Earnings Growth(5 Year)

Auto Components (-25)% 40%

Automobiles (-13)% n/a

Distributors 5% 4%

Diversified Consumer Services n/a n/a

Hotels, Restaurants and Leisure 15% 8%

Household Durables 4% 2%

Internet & Catalog Retail 18% 27%

Media 9% 8%

Multiline Retail 5% 2%

Specialty Retail 6% 4%

Textiles, Apparel & Luxury Goods 0% (-2%)

Consumer Discretionary Top 10 Companies – Revenues, Earnings, Margins and FCF

Companies Revenue (5 Year)

Earnings (5 Year)

Margins Free Cash Flow

McDonald's Corp. 3% 19% 33.6% 1.14%

Walt Disney Co. 4% 13% 10.6% 0.58%

Home Depot Inc. (-3%) (-9%) 14.6% 0.40%

Comcast Corp 14% 29% 8% 0.82%

Amazon.com 29% 26% 28.8% 0.94%

Target Corp. 7% 5% 15.1% 1.9%

Ford Motor Company n/a n/a n/a n/a

Time Warner Inc. n/a 4% 7% 2.94%

Lowe's Cos. 5% (-3%) 9.3% 0.03%

DIRECTV Group Inc. 13% 48% 24.4% 1.16%

Consumer Discretionary Earnings

Consumer Discretionary Sector Margins- Relative to S&P 500

Consumer Discretionary Sector- FCF Generation Compared to S&P

Consumer Discretionary Sector – ROE

Valuation Analysis - Sector Valuation

Absolute Basis High Low Median Current

P/Trailing E 53.7 17.2 21.0 35.1

P/Forward E 44.1 15.9 19.3 16.1

P/B 4.7 1.5 2.4 2.4

P/S 1.0 0.4 0.9 0.8

P/CF 14.3 5.7 9.2 8.8

Relative to SP500

High Low Median Current

P/Trailing E 3.9 0.69 1.2 1.9

P/Forward E 3.0 0.75 1.1 1.2

P/B 1.1 0.7 0.8 1.1

P/S .7 .4 .6 .7

P/CF 1 .7 .8 .9

P/B Relative to S&P 500

P/S Relative to S&P 500

P/CF Relative to S&P 500

Forward P/E Relative to S&P 500

Recommendation

• The Fund should underweight this sector when compared to S&P 500 index.• The Fund should rebalance the sector by selling some retail sector stocks.• We see 20% - 50% returns in some select industries in this sector.

• Automobile and components• Internet & Catalog Retail

• Major positives for this sector is improvement is Consumer Confidence.• Biggest risk - Unemployment.• We recommend that the Fund should rebalance by selling 300 basis points

of retail stocks in this sector and buy 300 basis points of automobile and components industry stocks and Internet and Catalog Retailing to keep the SIM weighting relative to the S&P500 at 6.99%.

Questions