It never ceases to amaze us how much attention is given to consumer sentiment surveys south of the border. On Friday, a widely followed sentiment survey was released that indicated American consumer sentiment had dropped. Only a month ago that same survey indicated that consumer confidence was soaring, hitting its second highest point since 2007 according to Business Insider. More remarkably, this same survey hit an 11-year high in January of this year according to Thomson Reuters. However, these high-flying confidence readings turned out to be in stark contrast to the actual behaviour of consumers in the real economy. As Bloomberg reports, not only did retail sales disappoint in April, but they actually contracted in the first quarter of the year.
Generally speaking, we have found American confidence surveys to be more a confirmation of the prevailing price of gasoline than anything else. We mention these surveys because the Canadian Consumer Cyclicals sector contains a number of stocks that sell into American and other international markets, particularly in the area of autos. Two of the top 5 performing stocks in the INK Canadian Insider (CIN) Index over the past 6 months are auto stocks in the sector (Uni-Sélect (UNS) +44%, Martinrea International Inc. (MRE) +31.1%) which serve the American consumer (this winter Uni-Sélect announced a deal to sell the bulk of its American business to Icahn Enterprises, a company affiliated with activist investor Carl Icahn). Winpak (WPK), also in the top 5 (+33.2%), is in the Basic Materials sector and is levered to the US consumer.
Source: INK Research
Despite the gloom in the latest consumer confidence survey, Canadian insiders are not giving up on American consumers. Or the Canadian consumer for that matter. Our 60-day INK Consumer Cyclicals Indicator has moved up above the 125% level at which point there are 1.25 stocks with key insider buying for every one with selling. The jump has been led by its shorter-term 30-day indicator which rose above 250% earlier this month. The rise has prompted us to put the sector on watch for an upgrade to undervalued.
One stock helping to push the indicator higher is western-Canadian consumer focused Shaw Communications (SJR.B) which recently saw another significant purchase by its founder, JR Shaw. The Calgary cable giant is also a member of the INK CIN Index. It has been an underperformer, however, dropping 12.4% over the past 6 months. It joins another stock in the Consumer Cyclicals sector Canada-focused easyhome (EH) in the worst 5 performing stocks in the INK CIN Index. That said, like Shaw, easyhome has also seen key insider accumulation recently.
Source: INK Research
Friday marked the semi-annual rebalancing of the equal weighted INK CIN Index. Consequently, the index will automatically take some profits in the top performing stocks and boost its stake in underperformers such as Shaw and easyhome in order to bring all the stocks in the Index back to equal weight. Consumer Cyclicals will continue to be the largest sector in the Index at a 24% weight. Given the 10% weight of the defensive Consumer non-Cyclicals, the INK CIN Index will have more than one third of its stocks weighted towards the Canadian and global consumer.
While that may sound like a lot, at the end of the day the economy always depends on consumers.
An earlier version of this post appeared before the market open today on the INKResearch.com subscription website and the TD Direct Investing website.