“It’s Christmas in August,” said Staples (SPLS:NASDAQ) CEO Ron Sargent about the back-to-school shopping season. According to Sargent, “It's our biggest season from a customer traffic standpoint.”
This year’s back-to-school season is expected to be the best on record. The National Retailers Federation (NRF) expects back-to-school shopping to total a record $17.6 billion, or $527.08 per family with school-aged children.
Compare this to a few previous back-to-school seasons. The previous five-year high in back-to-school spending came in 2004 when families shelled out $483.28 on average. Last year, spending dipped to $443.77.
As you can see, the NRF is expecting a stellar back-to-school shopping season, with an anticipated 19% rise. When expectations are this high, I rarely see too much profit opportunity. But in this case some still exist.
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The most popular ways to play the back-to-school season are the office-supply stocks. However, only 35.8% of shoppers expect to visit an office-supply store for their children’s back-to-school needs.
Also, office-supply stocks have had a rough time in the past when they missed the mark. Following last year’s poor showing in back-to-school season, OfficeMax (OMX:NYSE) shares plummeted 20%. But OfficeMax shareholders weren’t the only ones feeling the pain last year: Shares of back-to-school favorite Office Depot (ODP:NYSE ) slid 16% during the same time period.
Office-supply stores are not even the top three visited locations for back-to-school shoppers. According to a recent BIG Research poll, 72.2% of them are headed to discount stores, 53.3% department stores, and 30.9% specialty stores (survey respondents were allowed to answer more than once).
Simply put, there’s significantly less of a need for pens and pencils anymore. With the sharp increase in the number of computers in schools, it’s more likely that a student will need a portable USB Flash Drive than a new pencil sharpener.
That’s why electronics sales are going to be leading the 2006 back-to-school shopping season. After all, that’s what caused the weakness in back-to-school sales last year, just look at the numbers.
In 2004, $3.09 billion was spent on electronics for back-to-school. This declined to $2.06 billion 2005. Current NRF expects resurgence in electronics buying this year, with its official estimate pegged at $3.82 billion. That’s a pretty staggering amount.
The best way to play the resurgence of back-to-school electronics is with Linear Technology Corp. (LLTC:NASDAQ). Linear is a key player in the electronics industry. Even though you won’t see its brand name on products throughout your house, they’re probably inside.
Linear’s seemingly limitless product lineup can be found in almost everything electrical. Cell phones, disk drives, radars, satellites and cable modems all rely on Linear products. Even new calculators and other portable electronics use them. That’s why Linear is a great way to play the back-to-school shopping season and get in ahead of everyone else.
Even without the back-to-school shopping season, Linear looks good. The company has been growing at a 22% clip during the past five years and is expected to continue a similar level of growth in the future. And its growth hasn’t come at the expense of performance, either. Linear boasts an impressive profit margin of 39.2% and an operating margin of more than 51%. On top of all that, Linear’s stock yields 1.9% and trades at a relatively low P/E of about 23.
Linear, however, has been caught up in the SEC’s informal investigation into stock-based compensation. Despite that drawback, Linear is very attractively priced. As the electronics industry gets back on its feet for the 2006 back-to-school shopping season. There’s going to be a big push to replace inventory that will keep Linear’s factories humming in 2007.
Enjoy your day.
Andrew Mickey
Editor, Fear and Greed
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