QE3 and the Rich: What Stocks Will Benefit?
Monday, October 29th, 2012
By George Leong, B.Comm. for Profit Confidential
The initial support for the third round of quantitative easing (QE3) has faded as the focus shifts to earnings, the economy, the pending fiscal cliff, and the presidential election. I think there’s a sense that QE3 is not the savior to the stagnant gross domestic product (GDP) growth in America, but is only a gamble. The reality is that the flow of easy money will largely reward the top one to five percent of income earners and, in turn, will benefit the high-end merchants in the retail sector.
A recent study from A.T. Kearney reports, “The richest consumers have a higher percentage of discretionary spending, and dominate not only such categories as hotel stays and financial services, but also hospital and outpatient services, as well as newspapers and magazines.” (Source: “A.T. Kearney Study of Global Wealth and Spending Projects $12 Trillion in New Consumer Spending over the Next Decade,” A.T. Kearney web site, last accessed October 24, 2012.)
Let’s not beat around the bush. The reality is that QE3 will help people who carry significant debt to lower financing costs for another three years. The low interest rates mean cheaper cash will be available for the rich to make more money and finance spending, whether that’s on investments, housing, or other high-cost ventures. This means the rich, with their larger pool of capital, can continue to increase their net wealth faster than the average American.
A viable investment strategy to play the effect of QE3 is to determine which companies in the retail sector will be the benefactors of the policy. (Read about my favorite Internet stocks in “Here are My Favorite Internet Plays.”)
A contrarian play in the high-end retail sector that could benefit from the decision of the Fed to launch QE3 is Saks Incorporated (NYSE/SKS), a seller of men’s and women’s fashion apparel, shoes, accessories, jewelry, cosmetics, and gifts. The most known banner is its “Saks Fifth Avenue” (SFA) stores that are free-standing or in higher-end malls.
Saks has been closing underperforming stores. As of September 5, its retail network included 45 SFA stores and 64 “OFF 5TH” stores, along with Saks.com.
I believe Saks has good potential to advance in the retail sector, especially given that QE3 will largely benefit the top five percent who control the majority of the country’s financial assets and those who are in the upper-Middle Class segment.
QE3 will also reward Coach, Inc. (NYSE/COH), a seller of high-end bags, purses, and accessories. Coach fell short on its fiscal fourth-quarter sales, but longer term, I see above-average potential for the luxury bag maker in the retail sector, especially in China, where the company reported same store sales growth in the double digits.
On the jewelry front, Tiffany & Co. (NYSE/TIF) is tops in the retail sector for high-end jewelry but, like Coach, Tiffany & Co. is battling some near-term bumps.
While Coach and Tiffany & Co. face some growth issues in the retail sector, you cannot say the same for high-end clothing retailer Michael Kors Holdings Limited (NYSE/KORS), which is estimated to report sales growth of 36.9% in fiscal 2013 and 25.3% in fiscal 2014, according to Thomson Financial. KORS beat on earnings-per-share (EPS) estimates by 122.2% in its fiscal third quarter and by 37.5% in its fiscal fourth quarter. Based on its operating results, Michael Kors could be a special stock in the retail sector going forward.
So, follow the rich, and I bet they will be buying at these aforementioned retailers in the retail sector.