Finding Value In Consumer Durables – A Very Diverse Sector

This is part 3 of a series where I have conducted a simple screening looking for value over the overall market based on industry classifications and subindustry classifications reported by FactSet Research Systems, Inc. In part 1 found here, I covered the Consumer Services Sector.  In part 2 found here, I covered the Communication Sector.  In this part 3, I will cover the Consumer Durables Sector and its many diverse subsectors.

Table of FactSet Sectors and Subsectors

In each article in this series, I will be providing a listing of screened research candidates from each of the following industry sectors, the sector I’m covering is marked in green:

(Click on image to enlarge)

A Simple Valuation and Quality Screening Process

With this series of articles, I will be presenting a screening of companies that have become attractively valued primarily as a result of the bearish market activities experienced in 2018 from each of the above sectors. I will be applying a rather simple valuation and quality-oriented screen across each of the sectors. First, I have screened for investment-grade S&P credit ratings of BBB- or above. Next, I have screened for low valuations based on P/E ratios between 2 and 17. Finally, I have screened for long-term debt to capital no greater than 70%.

By keeping my screen simple, and at the same time rather broad, I will be able to identify attractively valued research candidates that I might have overlooked through a more rigorous screening process. In other words, I’m looking for fresh ideas that I might have previously been overlooking. Furthermore, I want to be clear that I do not consider every candidate that I have discovered as suitable for every investor. However, I do consider them all to be attractively valued. Additionally, I also believe that every investor will be able to find companies to research that meet their own goals, objectives and risk tolerances as this series unfolds.

In this part 3, I have found 9 research candidates from the Consumer Durables Sector as follows:

Sector 3: Consumer Durables

Motor Vehicles

Automotive Aftermarket

Homebuliding

Home Furnishings

Electronics/Appliances

Tools & Hardware

Recreational Products

Other Consumer Specialties

As I suggested in part 2it is not only a market of stocks it is also a market of sectors. Although virtually every sector will contain companies that are quite different from each other, you will commonly also find great similarities for companies in each sector. For example, this Consumer Durables Sector has a lot of things in common within each respective company in the sector. The key is in the name. Consumer Durables are products that have a long shelf life. Consequently, they are also products that typically do not have to be continuously replaced, at least on a short schedule.

Products such as motor vehicles, homes, and home furnishings, electronic appliances, tools, and hardware, etc., can be held onto especially during bad economic times. In other words, consumers can wait to replace or repair these items if necessary when the economy is weak. Consequently, one attribute that many Consumer Durables’ companies share is significant vulnerability to recessions. As I review the 9 research candidates in this sector, I ask that the reader note two things about their operating performance during recessions. First, note that their profitability and their dividends performed horribly during the Great Recession of 2008. Next, note that they all have tended to perform great since the recession ended.

This kind of operating behavior is a primary reason why I believe in first evaluating a company over a long historical period. I believe it’s important to understand, as comprehensively as you can, the “nature of the beast” so to speak. Unfortunately, evaluating a business over a shorter timeframe can often mislead you into believing things about the business that are not necessarily true – at least over the long run. Therefore, when analyzing a stock, I always start with a long timeframe – 20 years or more. Then from there, I will shorten the timeframe incrementally. This process can provide important and significant insights into the business being examined.

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Disclosure: Long WHR.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the ...

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