I’ve been watching the DJIA slip to -500 points today as Bernake and Bush spoke to prevent just that from happening. Everyone in the news is talking about the economy is going to go down even more. In my mind though, I wonder how much of our buying behavior in consumer goods will decline in the next 12-36 months. It’s unrealistic to expect that US consumers will just stop buying goods altogether, yet the people selling off are signaling that this is what they expect. Additionally, despite all the news about the stock sell-off, no one ever mentions that an equal number of buyers are getting stocks on the cheap. It’s not a market after all without sellers and buyers at the same time.

In order to try to foresee what companies will do fine during these times, it’s important to take a look at what consumer behavior will be in these times. What are the items that we won’t stop buying or will buy more of because of this slowdown? Will we eat out less? Will we go to Starbucks less? Will we buy less presents for the holiday season? Historically, one would expect that companies like Walmart (a discount goods seller) would do well in these times, yet even Walmart’s stock price is dropping. Is that a reasonable sell-off?

Identifying individual companies are secondary to identifying the sectors/industries first. I would expect that restaurants will suffer, for example. But if restaurants suffer, and assuming we all still have to eat, then that should push people towards grocery stores, right? Which stores are doing well? Trader Joes? Whole Foods? Safeway? I’ve noticed that Safeway has made a lot of changes to their store to put them at par with the look and feel of a Whole Foods Market, yet without the pretension and with familiar brands. I would think Safeway is worth a look. I think ‘joe-six-packs’ would stop buying organic if forced to choose between eating regular produce versus not eating at all.

One area that’s obviously hit hard is the financial sector. However, we should take a look at companies here that may fare better than others. One set of companies that may come out ahead once the economy does better are the credit card companies. During these times, people will be using their credit cards more because of lack of cash. Each transaction equates to revenue for a Visa, Mastercard, or an American Express. Then, when people payback their debts, the interest rates are additional revenue. In the case of Visa and Mastercard, the banks issuing the card get that revenue, but in the case of American Express, that revenue goes directly to the company. Furthermore, AMEX issues cards to higher income folks, so the likelihood of default may be lower. It’s probably worth a look to see how far AMEX has fallen in the last few weeks, as the fall may not be necessarily warranted.

Obviously, residential developers are not going to do well in these times. People are having difficulties with finding loans already, and there’s a ton of foreclosed inventory out there. People who wanted to move out may not be able to buy homes now. Instead, these folks may decide to upgrade/remodel their homes. Will that mean that Home Depot and Lowes will do well? Or is that extra spending that people will just stay away from completely? If it’s the former, can we expect that floor and carpet manufacturers will do well? How about furniture and kitchen stores (Pottery Barn, Williams-Sonoma)?

A few companies I will be thinking about in the next weeks:
1) safeway
2) american express
3) yum brands (taco bell, pizza hut, KFC)
4) starbucks
5) pfizer
6) genentech

any others come to mind?