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The Effect of 'Cocooning' on Stocks

September 22, 2002

By Scott Herhold
Mercury News

It's been said so often that it's become part of our mantra: The consumer has kept the American economy from falling apart. What happens when the consumer tires?

A Maryland-based research outfit has taken a hard look at that question in a poll this month. The answers aren't encouraging. But amid them are a few investment ideas.

The poll was conducted by a group called ChangeWave Alliance, which periodically polls its members -- hundreds of professionals, largely in tech -- about various investment ideas.

This time, the ChangeWave researchers were probing an easy-to-grasp domestic issue:

Were its members spending less on consumer goods and services? And if so, what areas suffer?

The answers mirrored national surveys that show consumer confidence slipping. Sixty-two percent of the 893 respondents said they were cutting back spending -- and one-quarter said they had done so by 10 percent or more.

That by itself may not be so dramatic. But the survey pointed to two or three areas where spending cuts will be most severe -- traveling, dining out and certain luxury items. And that fits in broadly with one of ChangeWave's big themes since the Sept. 11 attacks -- what it calls the "cocooning" of the country, or withdrawing to home.

What does this mean for specific stocks? Well, for starters, the ChangeWave people are bearish on the prospects of travel and restaurant stocks.

"We pick restaurants as short-selling ideas based on the assumption that if people are cutting back, expensive restaurants are the first to be hit," says Michael Shulman, the director of research for ChangeWave.

Among those they think could fall are Lone Star Steakhouse (STAR), Ryan Family Steakhouse (RYAN), Landry's (LNY), Outback (OSI), restaurant supplier Sysco (SYY), and online travel agencies Expedia (EXPE) and Hotels.com (ROOM). They also think that companies that supply temporary staffing to tech companies, like Manpower (MAN), will suffer.

There's evidence to back this up. Lone Star, for example, fell sharply early this month when it announced its same-store sales for the previous quarter had declined 2.4 percent.

What's to like? From their poll and anecdotal evidence, the ChangeWave people believe that the market will bless stocks that deal with low-to-moderate home furnishing and home entertainment -- the cocoon stocks.

Among those they suggest looking hard at are Pier 1 Imports (PIR), Petco (PETC), Veterinary Centers of America (WOOF), Michael's Arts & Crafts (MIK), Whole Foods Market (WFMI), Tractor Supply (TSCO) and Office Max (OMX).

Of course, a falling market could make all these ideas tepid for a long while. But what I like about the ChangeWave survey is that it's based on common sense. Think how the people you know are spending -- or not spending -- their money. Don't defy their course.

FYI: As expected, the board of Vicinity (VCNT), a Sunnyvale online site I wrote about a couple of weeks ago, rejected an offer from an East Bay investment group, Maloco, to take over the company and return $2.65 a share to stockholders. It laid out its reasons in a lengthy press release.

"The board feels the company is worth a lot more than $2.65 a share," said Vicinity CEO Chuck Berger. "The business is turning, and that will continue to show in our financial results." So far, the market remains skeptical. VCNT finished Friday at $2.22, down 4 cents.