Consumer Rebound? Fore!

In Tuesday’s Goldman Guide we pondered the question, ‘Is the Party Over?’.  A good piece of news came out yesterday with the publishing the University of Michigan’s Consumer Confidence Index (CCI) which rose to 76.2 for May 2013, the highest level in 5 years.  While I do not think this is the end all be all of economic metrics by any stretch, especially being a graduate of The Ohio State University, this may be yet another sign of the continuation of this gradual turnaround in the US.

Investors and traders still need to be wary of the scandals in Washington, as we alluded to; voids in leadership are not good for markets.  However, this may be a time to look ‘cheap’ and go long in an industry that has been clobbered since the advent of the Great Recession: the golf industry.

For almost two decades golf was the fastest growing recreational sport in the United States.  Then, a couple of very negative events occurred in 2007-2008.  First, we had the start of the economic downturn.  Enough said.  Second, in many parts of the country, supply had been outpacing demand in the areas of golf courses primarily and golf shops secondarily for several years.  The economic slowdown magnified this phenomenon.  The slow but sure economic rebound and positive news on the CCI might indicate that consumer discretionary spending, for things like golf, might also be headed for a rebound.  Another factor for the industry rebound could be the number of baby boomers entering retirement, which runs to the level of roughly 10,000 per day.  Golf and retirement have long gone hand in hand.

With that in mind, Callaway Golf Company (NYSE- ELY- $6.80) is a stock in our small cap world with very strong brand recognition and recovering sales.  The company sells golf clubs and golf balls, and has carved out a niche as one of the industry leaders in ‘distance clubs’, i.e. drivers, fairway woods, and hybrids.  The stock has been hacked down from the $18.00 level in early 2008 to current levels today.  The company had a profitable 1Q13 beating on both revenue and EPS with estimates for break-even to flattish EPS for 2013 but then spiking up to nearly $0.20 in 2014.  Again, take these numbers with a grain of salt, as the economy definitely needs to keep improving for the turnaround in Callaway to continue.

There are some well priced options in August and November in ELY for those looking to take some income and hedge with a covered call strategy.  On the technical side the chart analysis yields a very bullish indication in the short term for both EMA and MACD, our two favorites.  A short term target of $8.00 is possible, but this one may be worth holding onto if it breaks through that number in relatively short order and more positive economic news is the trend.

Have a great day!

Aaron Schweitzer

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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