Christmas is the busiest time of year for Retailers. While it is not the only period where large volumes of sales are made (think end of Financial Year discounts), it is the core driver of business that has an overwhelming influence on sentiment towards stock market investment. A strong Christmas shopping period will typically influence good earnings results, which helps drive stock prices higher.
Here in Australia, there are a number of trends that have been changing in more recent years. The first is the shift from a traditional Christmas present to gift cards. These are a winner for the company issuing them, as many expire unused and without being claimed. Money for nothing!
The other big trend is that many shoppers are holding off for Boxing Day sales as we have been conditioned to receive discounts on floor stock that didn’t move during the lead up to Christmas. This is also another time for those gift cards to be used, gaining more “bang for your buck”.
But as investors, how can we benefit from the increase in consumer spending, or the actual lack of consumer spending?
First and foremost is investing directly into retailers such as JB HiFi, Harvey Norman, Woolworths or even Coca-Cola. Of course, your analysis should support an increase in spending habits that will influence an increase in Revenue, as well as decent profit margins. Otherwise, there would be no reason for investors to want to hold the stocks in the first place.
Secondly, investing; indirectly. This could be through buying stock in those institutions that facilitate the credit cards that are used extensively for purchases. Think ANZ, CBA, or NAB. Alternatively, what about American Express, MasterCard, or Visa which are listed in the US markets.
Another indirect investment might be through an Exchange Traded Fund (ETF) for the Retail sector. There isn’t an ETF available on the Australian Stock Exchange (ASX) for retail, however, the US stock market has several with the SPDR S&P Retail ETF (code: XRT) the key stock. This ETF is traded as a stock, but invests in the companies that represent the Retail sector. Therefore, you can gain exposure across numerous companies rather than just a few.
Risks that we are not as giving this year
With all investing, there are Risks. If the Christmas shopping period shows weaker results either than expected, or compared to last year, then this will spook investors and push stock prices lower. Less Revenue means less potential for profit (unless the company can improve margins by cutting operational costs). And right now, this is the unknown factor.
In the US, the Thanksgivings Day public holiday which falls on a Thursday each year, is the benchmark for the Christmas Shopping period. It is referred to as the Black Friday shopping period, with the extended weekend including Thursday and a half day Friday. Traditionally it is the weekend where many consumers rush out to get the bulk of their shopping done. The sales figures for that long weekend will define the benchmark for how the sector is viewed into the New Year.
But there are also trend changes occurring in the dynamics of how consumer behaviours are influencing shopping results. More and more consumers are shifting online, and therefore, we need to start investigating the likes of FedEx and United Parcel Services to gain insight into consumer spending.
More online activity also boosts the likes of Amazon.com and eBay. Revenues for Google, Twitter, LinkedIn and Facebook will also increase as more online activity means more ad revenue. Does this also mean more Internet activity to influence the upload/download access through Telecommunication companies? Possibly.
Colder Weather may hold the key
A White Christmas is something of a dream for Australians, living in the southern hemisphere where our Christmas’s are typically defined by Prawns at the beach or a game of cricket in the backyard. But in the US, the weather activity has a direct affect on economic activity.
Last year, there was an extended cold period which had a direct affect on the national GDP (Gross Domestic Product) figures for the 1st quarter. In essence, exceptionally poor weather over an extended period of time caused an impact on transportation of goods, kept consumers indoors, and resulted in less economic activity. Not just in a section of the economy, but across a large portion of the country.
We don’t have the same impact here in Australia. If we have an exceptionally hot Christmas, it drives the population into the comfort of Shopping Mall air-conditioning. Subsequently sending revenue figures higher.
Stock market direction here in Australia is not directly tied to how the US stock markets move, but there is a correlation. Mostly when there are significant movements. So if the US markets react positively or poorly to the results of the Black Friday weekend, there is potential for the Australian stock market to follow.
I’m not going to take a guess at how this weekend will play out. I’ll leave that one for the punters. However, once we have a clearer picture of the stock market reaction on Monday, I will be evaluating for opportunities to take advantage thereafter. Until then, I’m off to start my Christmas shopping to add my 2cents to the economy.
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