Consumer electronics: Now a holiday staple?

From Black Friday door-buster specials on flat-panel TVs to stocking stuffers like MP3 players and e-book readers, shopping for electronics has become as synonymous with the holiday shopping season as decorating Christmas trees

Over the past several years, consumer electronics appear to have morphed from holiday treats to holiday essentials. From Black Friday door-buster specials on flat-panel TVs to stocking stuffers like MP3 players and e-book readers, shopping for electronics has become as synonymous with the holiday shopping season as decorating Christmas trees. In the opinion of S&P Equity Research Services (ERS), 2010 will be no different.

ERS projects an overall sales increase of 2.5% to 3% for the three-month holiday period from November to January. While Black Friday sales rose just 0.3%, sales from the Thanksgiving holiday weekend surged 9.2% higher, according to the National Retail Federation. Furthermore, comScore reported that Cyber Monday, a critical day for online retail, posted a 16% rise! If nothing else, the strong start to the holidays illustrates that consumers are starting to feel more comfortable spending again as fears of losing their jobs have largely abated, according to ERS.

This rise in spending should translate into strong demand for electronics, with research conducted by the Consumer Electronics Association indicating that electronics items comprised four of the top ten items on adults’ holiday wish lists. Notebook computers (2nd) and Apple’s iPad (3rd) came in just behind the wish for peace and happiness, and both e-book readers (5th) and video game systems (9th) also cracked the top 10. ERS thinks popular products this holiday season may also include smartphones and motion-based accessories for video game systems such as Sony’s Move and Microsoft’s Kinect. In addition, Blu-Ray players could be found for as little as $50 as a door-buster special on Black Friday, and many units are selling for less than $100 this holiday season. ERS thinks these reduced prices will lead to strong sales of both players and Blu-Ray movies.

Traditional big box retailers such as Best Buy and Gamestop both saw increased traffic over the Thanksgiving weekend, and should benefit from the increased attention the holidays bring to this industry, according to ERS. In addition, electronics are also rapidly becoming a favorite online purchase, and Amazon.com continues to capture market share in this channel. In fact, electronics and other general merchandise now comprise more than 50% of Amazon’s revenues, and ERS expects Amazon to be among consumers’ favorite shopping destinations for electronics this holiday season.

While electronics should post a mid single-digit increase this holiday season, according to ERS, some items may be under pressure, including notebook computers and flat-panel TVs. While notebook computers are still well-ranked on wish lists, last year’s launch of Windows 7 makes 2010 a more difficult hurdle for this product category. While ERS still anticipates slight year-over-year improvement for notebooks despite the difficult comp, the same cannot be said for flat-panel TVs.

While unit growth in flat-panel TVs is likely to show modest improvement, ERS anticipates significant discounting at retailers to drive these sales. For one, the market for flat-panel TVs is nearing saturation, with a majority of U.S. households owning at least one. Moreover, inventories are significantly higher as manufacturers overestimated demand throughout the summer and early fall. As a result, it is likely, according to ERS, there will be average selling price declines of 20% or more this holiday season in an effort to clear the excess inventory. While 3-D TVs may help drive some added interest in this category, ERS thinks high price points, a lack of 3-D content, and the burden of having to wear glasses while watching TV will keep this product from reaching mass adoption levels in the near term.

Looking beyond holiday and into 2011, S&P Economics expects macroeconomic pressures to continue to ease gradually, and projects overall consumer spending growth of 2.4%.

The stocks identified by ERS as most likely to benefit from this thesis are Apple, Best Buy, and GameStop. Amazon and Microsoft, also mentioned in this story, are ranked “hold” by ERS. ERS recommends selling Sony.

Company / Ticker	S&P ranking	Price ($)	($ in billions)	Relative strenght	52-week high	52-week low
APPLE / AAPL	5	311.15	285.42	74.00	321.30	188.68
BEST BUY / BBY	4	42.72	17.00	68.00	48.83	30.90
GAMESTOP / GME	4	19.92	3.00	49.00	25.75	17.12
^{Data as of 11/30/10. S&P Ranking: STARS represent S&P Equity Research’s evaluation of the 12-month potential for stocks, with 5-STARS (strong buy) assigned where total return is expected to significantly outperform the total return of a relevant benchmark over the coming 12 months, and 4-STARS (buy) assigned where total return is expected to outperform the total return of a relevant benchmark over the coming 12 months. For important regulatory information, please go to < a href=http://www.standardandpoors.com>www.standardandpoors.com and click on “Regulatory Affairs.”}

S&P employs a proprietary methodology for ranking mutual funds and exchange-traded funds (ETFs); rather than looking only at past performance, S&P also incorporates analysis of the underlying holdings and their likely future prospects, as well as risks and costs. Funds or ETFs that hold stocks viewed as undervalued by S&P equity analysts are more likely to get a high ranking from S&P’s proprietary quantitative ranking tool.

Many mutual funds or ETFs hold one or more of the stocks mentioned in this story as a top-ten holding; the mutual fund table screens for those that are domestic equity funds with a five-star ranking from S&P, positive inputs from the S&P quantitative methodology on performance, costs, and risks, open to new investors with no load and a minimum initial investment of $10,000 or less, and overall assets of $50 million or more. Excluding index oriented mutual funds, two of them had a recent top-10 holding in both Apple and Best Buy.

Fund / Ticker	Expense ratio	YTD % return	1-yr % return	3-yr % avg return	5-yr % avg return	10-yr % avg return	Holdings
Amana Growth / AMAGX	1.21	10.78	14.32	0.68	6.22	5.52	82.00
Bridges Investment / BRGIX	1.02	6.65	9.11	-2.62	-0.14	-0.51	66.00
^{Data through 11/30/10. Total returns include reinvested dividends and capital gains, all annualized; calculations do not reflect the effect of sales charges. Source: S&P Mutual Fund Reports.}

Similarly, many ETFs hold at least one of these recommended stocks as a top-10 holding; this list contains those that garner an “overweight” ranking from S&P.

ETF / Ticker	Price($)	Gross expense ratio	YTD return	Avg annualized return since inception
iShares Russell 1000 Index / IWB	66.98	0.15	8.70	0.10
iShares S&P 100 Index / OEF	54.15	0.20	5.10	-1.30
iShares S&P 1500 Index / ISI	54.90	0.20	8.90	2.90
iShares S&P 500 Growth Index / IVW	63.78	0.18	9.00	-1.40
iShares S&P 500 Index / IVV	121.02	0.09	7.80	-0.20
SPDR Dow Jones Large Cap / ELR	56.58	0.20	8.70	1.50
SPDR S&P 500 ETF Trust / SPY	120.62	0.10	7.90	7.60
Vanguard Large-Cap Index / VV	55.19	0.12	8.50	3.10
Vanguard Mega Cap 300 Index / MGC	41.12	0.13	6.60	-4.60
^{Data through 11/30/10. Source: S&P ETF Reports. For important regulatory information, please go to www.standardandpoors.com and click on “Regulatory Affairs.”}