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VERSACE: Chew over thoughts of Apple and spices

- - Thursday, November 25, 2010

ANALYSIS/OPINION:

While many were tuning their eyes to looming military campaigns by North Korea and woes associated with the Irish economy and a potential bailout, many others, including me, were digesting news and other information while trolling the grocery aisles while shopping for this year's Thanksgiving feast. Surprisingly, the stores were fairly quiet when I was out and anecdotal evidence from others suggested that the mood this Thanksgiving was far quieter than usual. Perhaps people are resting up for the early Black Friday sales, some of which kick off as early as 3 a.m. while other stores are open on Thanksgiving Day.

In my book, those are brave shoppers. Though I have been called a brave one in my day, I'm more inclined to be an online shopper when I can and it would seem I am not alone. According to comScore Inc., online retail spending for the November and December period will reach $32.4 billion, an 11 percent increase versus last year. As always, context is key, and in looking at last year we find that not only are this year's online sales up, but comScore sees them growing faster than last year's 4 percent increase. Sounds good for UPS and FedEx.

As I have stressed before, I need more than one data point to hang my hat on. In this case, if we think about online shopping and retail in general, products and other goods need to get to the retail locations, so I examined recent trends in rail-car and truck traffic. In October, rail-car traffic was up 8.7 percent, according to the Association of American Railroads while truck tonnage increased 6 percent in October, according to the American Trucking Association.

That strength continued into November per the railroad association as intermodal freight traffic grew 11 percent for the week ending Nov. 13 compared with the same week a year ago. Normally, intermodal demand begins to weaken in November as the peak season for containerized imports passes. However the railroad association report showed intermodal container volume edged up 0.5 percent on a week-to-week basis in the week ending Nov. 13.

Based on the above, it seems that retailers and more are bracing for a better holiday shopping season. However, just because the retailers have the goods does not necessarily translate into shopping being up across the board. I say this as it looks like there is a bifurcation in the retail world with shoppers favoring lower-priced products that you might find at Target, Wal-Mart and the like, as well as higher-priced, branded goods from companies like Apple.

According to research performed by ChangeWave, consumers who report plans to buy a new notebook computer in the next 90 days have peaked to 10 percent of the survey group of 2,812 people, the highest level noted in the last three years. Per ChangeWave, "the manufacturer most responsible for the surge in laptop demand is Apple, with 36 percent of planned laptops buyers saying they'll purchase a Mac, a huge 11 percentage point jump since our previous survey of a month ago."

The question that remains is how retailers in the middle will fare this holiday season — not a small question given the potential ripple effect. Already, we can see shopping centers and malls with closed storefronts while other establishments are cutting back their open hours and staff. Donning my investor hat, the looming risk to watch is whether or not shoppers are willing to part with their dollars as much as retailers expect.

On the one hand, retailers have some reason to be upbeat. While it may reflect pent-up consumer demand over the weak environment over the past two years, there are some signs of life for consumer spending. The National Restaurant Association reported that same-store sales rose in September for the first time in six months. It would appear that this rebound was fairly broad-based as data from Technomic showed the restaurant business was up in all sectors — from fast food to casual to tablecloth — from Hardee's to Applebee's to Morton's.

Even so, pockets of weakness remain in the restaurant sector as Tim Hortons and Ted's Montana Grill are closing units and the parent of Charlie Brown's Steakhouse filed for Chapter 11 bankruptcy protection. Much as I dished on retail above, we have to keep our eyes not only on how much consumers are spending but where they are spending in order to determine which companies are benefiting this holiday season. Not until we see a pronounced improvement in disposable personal income are we, in my opinion, likely to see a true across-the-board pickup in retail and restaurant consumption.

Based on the above, the three companies I would suggest readers examine further are Trinity Industries, a leading manufacturer of rail cars, and McCormick & Co., a significant player in spices, herbs, seasonings, specialty foods and flavors to the entire food industry from the home to the industrial kitchen. The last is Apple Inc., which is especially well positioned for the ongoing transition toward digital content consumption.

For both holiday shopping and investment ideas, good hunting.

Chris Versace, the thematic investor, is director of research at Think 20/20, an independent equity research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.