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Commentary

3 Consumer Cyclical Names at Bargain Prices

Despite headwinds from the payroll tax-cut expiration, the sky isn't falling on consumer spending, and these firms look undervalued.

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 Wal-Mart Stores (WMT), and consumer spending, has been in the spotlight the last few weeks. Earlier this month, Bloomberg News published internal emails from the retail giant which described early February sales as a "total disaster." And Wal-Mart's earnings released this week seem to confirm that the firm's core customers are under a fair amount of pressure at the moment. Morningstar's Michael Keara thinks the biggest culprit is the  expiration of the payroll tax cut at the beginning of this year that is hitting lower- and fixed-income households the hardest. Is this a sign that consumer spending is about to be hit and that consumer cyclical stocks as whole look unattractive? We think not.

As Morningstar economist Bob Johnson has pointed out, some of Wal-Mart's short-term issues are idiosyncratic and the firm's anemic forecast is likely not the canary in the coal mine of consumer spending. Looking at the broader retail landscape, Johnson sees a murky picture, but one that appears to show the consumer soldiering on. Yes, the payroll tax increase, high gas prices, and delayed tax refunds are headwinds, but other factors, such as increased minimum wages in some states and higher Social Security payments, are helping mitigate the pain. To be sure, the consumer may very well come under increased pressure in the months to come, but the sky does not appear to be falling.

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.