CPI Favors Trade-Down Stock Plays

Got a Hot One for Ya!

A common thread of insight runs through the Consumer Price Index data. The wisdom is that consumers continue to trade down. We saw it initially in the market share gains of Wal-Mart (NYSE: WMT) and the dollar store chains. We continue to see it in the CPI for August, with used auto sales soaring. Thus, we've decided to do some research for you, and find you some trade-down stock plays that haven't been played out.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

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CPI Favors Trade-Down Stock Plays

There is a common thread running through the Consumer Price Index (CPI) for August. We see price increase in certain industries that share this common characteristic, and where demand for goods is actually on the increase. As consumers suffer through the worst recession in generations, they are increasingly looking for bargains and cheaper options generally. For instance, the average price tag on a used vehicle is up substantially this year. Similarly, rents are on the rise, or will be. Thus, we believe that the same reason discount retailers are stealing market share, is a catalyst for other businesses as well. That's why we are looking for new opportunities for investors to exploit the trade-down stock play.

Many might argue that the trade-down play is played out, with discount store retailers like Wal-Mart (NYSE: WMT), Costco (Nasdaq: COST) and Dollar Tree (Nasdaq: DLTR), having already benefited from capital flows. Admittedly, we were already looking ahead for the opportunity to lead the change in trend in the other direction. That's why we missed the opportunity to publish our prepared short call on Sears (Nasdaq: SHLD) earlier this year, which we anticipated would see shoppers moving out of its Kmart stores. However, as the recession drags on and it becomes clear that the economy will be mired in this mess for a long while to come, we are taking a look again at the trade-down play, especially in industries outside of regular retail.

First let's review the Consumer Price Index (CPI), which inspired the idea:

Following yesterday's favorable PPI report, the Bureau of Labor Statistics reported on the Consumer Price Index for August today. While yesterday's data covered producers, this measure is closer to the hearts of economists and policy makers, with their ear attuned to the rail for sounds of deflation these days.

Regular readers of the Consumer Price Index (CPI) Report focus on two bottom line data points. The Headline CPI metric aggregates consumer prices without adjustment for the significant swings in prices for food and energy, whereas the Core CPI weeds out those two factors, to provide the public with a more applicable inflation gauge.

The Headline Consumer Price Index increased a seasonally adjusted 0.3% in August, which was in line with economists' forecasts. This latest result compares against a seasonally adjusted increase of 0.3% in July as well. Removing seasonal adjustment shows a smaller 0.1% increase in the CPI in August. Moreover, the Headline CPI is only up 1.1% over the last 12 months; so much for inflation fears eh? (Canadians rubbing off on me)

Inflation Who, Inflation What?

Some of us expect inflation discussion will again rise to the fore over the next couple years. Over the past year or four, when asked by friends and passers bye what to go long in, I would mention only gold. Even despite the lack of inflation, gold is rising, I believe on bets for future inflation and on general currency devaluation across printing presses known as sovereign nations. I understand the near-term valuation question regarding gold though, which George Soros recently warned about as well; though his fund has a substantial holding in gold interests. It's a long-term favorite idea of mine now, while I would shy away from it near-term. At the same time, it's an asset that must be included in any diversified portfolio. It is our natural currency.

At the Core

Like in July, the energy component of the CPI played a key role in driving the substantial price rise. The overall energy component rose 2.3% in August, so that the removal of energy and food prices led to an unchanged Core Consumer Price Index. This matched against a 0.1% increase in July and also against economists' forecasts for the same gain this latest month. Before August, Core CPI had risen three months in a row.

Since the change in the trend for the Core CPI matched the change in its Shelter Index component, we point toward housing price softness as the key to overall price change here. For months now, we have been scribbling that housing would take a double-dip, and that prices would come again under pressure. This is due to the fact that the labor situation persists, and offers no support to change what labors housing. Meanwhile, financing has become significantly difficult to obtain, while fewer folks could qualify now even under the old standards. Within the shelter component, the index for rent declined 0.1%, its first decline since November of last year though. The index for owners' equivalent rent was unchanged and the lodging-away-from-home index fell 1.3%. I look for rents to hold steady and rise even further as demand for rentals increases, especially in the lower half of the market.

Looking more closely at energy prices, each individual source saw increase, with gasoline marking the sharpest. The Bureau reports that gasoline prices rose about 3.9%. Still, over the last 12 months, the price of gasoline is only up a net 4.4%, due to earlier declines. Fuel oil prices increased 0.9% (up 10.6% over last 12 months), and the cost of natural gas service increased 1.1% in August.

Food prices, which had declined in July, increased 0.2% in August. However, the cost of food eaten in homes remained stable, while the cost of eating out rose 0.3%. Fruit and vegetable prices rose 0.4% in August after a series of recent declines, and the indexes for cereals and bakery products, and for other food at home, also posted slight increases. In contrast, the proteins moderated, with the index for meats, poultry, fish, and eggs falling 0.3%. This ended a string of seven consecutive increases. The indexes for dairy and related products and for nonalcoholic beverages both fell slightly.

New vehicle prices increased 0.3% in August, much more than any rate recorded dating back to at least February. The price of used vehicles increased even more in August, up 0.7% last month. Over the last 12 months, the price for used cars has increased 15.5%. Apparel prices slipped modestly, while transportation and medical care costs increased. I'm guessing every Republican reading this will jump on it as an opportunity to attack Obama care.

The Take Away

This latest CPI report unveils an important trend that we could not help but take note of. Similarly to how consumers have traded down, visiting the mall less for trips to Wal-Mart (NYSE: WMT), Costco (Nasdaq: COST) and other discounters for necessities and everything else, the same drivers have led consumers to trade down in other markets. The price of used vehicles has skyrocketed this year, and this is obviously due to greater demand for cheaper used cars, which should be stealing market share from the new car market. That would also lead one to consider investment in the care of vehicles, and toward a company like Pep Boys (NYSE: PBY) for instance (depending on company specifics). In housing, the price of rent has been on the rise, and should continue rising, especially at the lower end of the scale. Thus, there should be other opportunities to exploit the "trade-down" stock play. Do you have any ideas?

We are officially starting a series of articles entitled "Trade-Down Plays," through which we intend to discover and present to you ideas for potential investment. In this series, we will go a step further than just presenting a name. We will use our expert equity analysis skill to vet these investment ideas for company specific concerns and valuation, and determine whether "The Greek" would have rated the specific security a buy, sell or hold in his old stock research days.



This article should prove interesting to investors in NYSE: PIR, NYSE: ETH, Nasdaq: HOFT, NYSE: HD, NYSE: LOW, Nasdaq: AAPL, NYSE: BBY, NYSE: LTD, NYSE: CHS, NYSE: ANN, NYSE: GPS, NYSE: M, NYSE: JCP, NYSE: JWN, NYSE: TJX, NYSE: KSS, Nasdaq: COST, NYSE: TGT, NYSE: WMT, Nasdaq: WTSLA, Nasdaq: HOTT, NYSE: AEO, NYSE: ARO, NYSE: ANF, NYSE: SAK, NYSE: TIF, NYSE: TLB, NYSE: LL, Nasdaq: BLDR, NYSE: FO, NYSE: LEG, NYSE: TPX, NYSE: AYI, NYSE: LZB, Nasdaq: SCSS, NYSE: ZZ, NYSE: FBN, NYSE: NTZ, Nasdaq: SHLD, NYSE: DDS, Nasdaq: BONT, Nasdaq: CPWM, Nasdaq: BKRS, Nasdaq: BEBE, NYSE: BKE, Nasdaq: CACH, Nasdaq: CMRG, Nasdaq: CATO, NYSE: CBK, Nasdaq: CTRN, NYSE: PSS, Nasdaq: DEST, Nasdaq: DBRN, NYSE: DSW, Nasdaq: FINL, NYSE: FL, Nasdaq: GYMB, NYSE: GES, NYSE: JCG, NYSE: JNY, Nasdaq: JOSB, NYSE: NWY, NYSE: JWN, NYSE: MW, Nasdaq: SYMS, Nasdaq: PLCE. Inflation traders may have interest in a few publicly traded master limited partnerships: Alliance Resource Partners L.P. (Nasdaq: ARLP), Alliance Resource Holdings (Nasdaq: AHGP), Atlas Pipeline Partners L.P. (NYSE: APL), Atlas Pipeline Holdings (NYSE: AHD), Atlas Energy Resources (NYSE: ATN), Boardwalk Pipeline Partners (NYSE: BWP), Breitburn Energy Partners (Nasdaq: BBEP), Buckeye Partners (NYSE: BPL), Buckeye Holdings (NYSE: BGH), Calumet Specialty Products (Nasdaq: CLMT), Capital Product Partners (Nasdaq: CPLP), Cheniere Energy Partners (AMEX: CQP), Constellation Energy Partners (PCX: CEP), Copano Energy (Nasdaq: CPNO), Crosstex Energy (Nasdaq: XTEX), DCP Midstream Partners (NYSE: DPM), Dorchester Minerals (Nasdaq: DMLP), Duncan Energy Partners (NYSE: DEP), Eagle Rock Energy Partners (Nasdaq: EROC), El Paso Pipeline Partners (NYSE: EPB), Enbridge Energy Partners (NYSE: EEP), Encore Energy Partners (NYSE: ENP), Energy Transfer Partners (NYSE: ETP), Energy Transfer Equity (NYSE: ETE), Enterprise Products Partners (NYSE: EPD), Enterprise GP Holdings (NYSE: EPE), EV Energy Partners (Nasdaq: EVEP), Exterran Partners (Nasdaq: EXLP), Ferrellgas Partners (NYSE: FGP), Genesis Energy (AMEX: GEL), Global Partners LP (NYSE: GLP), Hiland Partners (Nasdaq: HLND), Holly Energy Partners (NYSE: HEP).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.