Consumer Spending Is – and Isn’t - Back in Full Swing Yet

Just because a stock is rallying doesn’t mean it deserves to. Case in point? The consumer cyclical stocks.

The S&P 1500 Consumer Discretionary Sector Index is leading the charge year-to-date with its 10.8% gain… tops among all sectors. A closer look within the group, however, reveals too many of these stocks are higher based on hype rather than results. It’s a dangerous situation for investors, as stocks that didn’t deserve to rally may correct the errant move with a sizeable pullback.

Stocks that deserved their gains: While it was the first ‘improved’ year-over-year quarter since the recession began, Callaway Golf Co. (NYSE:ELY) just posted its strongest Q4 revenue in the past three years.

Although still in the red for 2009, Callaway’s fourth quarter paired with a realistic – as opposed to gratuitously optimistic – expectation of a 4% to 10% sales increase in 2010 actually justifies ELY’s 22% gain for the year so far…. one of the more modest rises within the cyclical sector.

Firearms manufacturer Sturm Ruger (NYSE:RGR) is another sporting goods company that actually saw a better Q4 of 2009 when compared to Q4 of 2008. Revenue was up 9%, and – get this – earnings per share was actually stronger by 24%. Even more compelling is the company’s panned re-entry into the police and military markets, with shotguns also on the radar.

Given that, the fact that RGR shares are up 29% for the year isn’t a big surprise. Yet, shares are also only back to mid-2009 levels despite 2009’s revenue being 50 better than 2008’s. The 2009 earnings improvement is an even more impressive 242%.

Stocks that are running on fumes: If the recession truly ended in mid-2009, then by Q4 revenues should have certainly been stronger that 2008’s fourth quarter sales. Not so for fitness equipment manufacturer Nautilus (NYSE:NLS), which saw a 16% dip in year-over-year sales. Yet, NLS shares are 55% higher since the end of December.

Brunswick Corp. (NYS:BC) is another mismatched example. The stock is up a whopping 400% for the last twelve months, yet the boat maker managed to do 22% less business in Q4 than it did a year earlier. Worse, 2009’s revenue was 44% lower than 2008’s.

In both cases, full-year numbers are understandably lower. Fourth quarter numbers, however, hardly suggest optimism is merited. How long before investors start to grow weary of en ever-costlier stock and a consistently-disappointing corporate performance?

Bottom line: Stop and think about the common elements the two revenue winners above had with one another, and what the two revenue laggards had in common. The former two companies sell products costing only a few hundred bucks, while the latter two companies are peddling big-ticket items with a price tag of at least four figures (if not more)…. a price-based disparity that could be found all throughout the product groups within the consumer discretionary sector.

So what? It may be a sign investors need to understand going forward. While consumer confidence is getting better, it’s not quite yet strong enough to prompt significant sales of higher-end toys. The lower-end fare is indeed seeing better days though.