The document provides an analysis of the Consumer Discretionary sector by the Dragon Fund for the third quarter of 2015. It identifies the Household Durables subsector as one to watch due to increasing housing starts, innovative home furnishings, and positive economic growth supporting home buying. However, risks include tight lending slowing housing demand. Overall, the sector declined in Q3 but outperforms based on fundamentals. Household Durables has above-average growth and trades at a below-sector multiple, making it an attractive investment opportunity.

1. 1
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Drexel University
The Dragon Fund
ConsumerDiscretionary2015 Q3 update
Subsectorto watch: HouseholdDurables

2. 2
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Executive Summary
The Consumer Discretionary team selects the Household Durables as its subsector to watch for
the upcoming quarter.
Key investment positives
 Increasing housing starts and lower unemployment rates create growth opportunities.
 Trend towards innovative and price competitive home furnishings offers additional room
for margin expansion.
 Interest rates combined with positive economic growth encourage home buying which
correlates directly to household durable purchases.
These investment positives are supported by above-average long-term earnings growth and
upward revisions in short-term growth estimates. However as the typical Household Durables
stock continues to trade at a below-sector forward P/E multiple, these positives do not seem to be
fully reflected in valuations.
Investment Risks
 Tight lending could keep housing demand low causing Household Durable growth
numbers to be revised.
 Wage growth could plateau leaving less disposable income for discretionary purchases.
 Interest rate hike could potentially lower the demand for new homes stunting Household
Durable industry growth.

3. 3
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Sector Review
Overall, Consumer Discretionary stocks experienced a negative third quarter, losing -4.30%
compared to the S&P 1500’s -7.33% return.
Total returns of Consumer Discretionary vs S&P 1500, Q3 2015 7/1/2015=100)
Source: S&P, FactSet
Consumer Discretionary stock price performance appears to be largely dependent on
fundamentals. The typical Consumer Discretionary stock tracks at a one-year forward P/E
multiple of just over 18, compared to the 10-year high of 19.15 and 10-year low of 11.97.
Meanwhile the S&P 1500 is trailing at just over 16, with a 10-year high P/E multiple of 16.90
and 10-year low of 10.55. In fact, Consumers Discretionary stock P/E has tracked relatively
closely to the market with charted P/E ratios intersecting regularly since 2007. The Consumer
Discretionary sector is highly dependent on economic forces. After converging in 2009
Consumer Discretionary Long Term Growth estimates have diverged from the S&P 1500 Long
Term Growth estimates. Outlook for Consumer Discretionary Long Term Growth supports
analyst opinion that the sector’s growth potential is outpacing that of the market as a whole.

4. 4
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Forward P/E comparison, past 10 years
Source: S&P, FactSet
LTG comparison, past 10 years
Source: S&P, FactSet

5. 5
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
The good performance and positive outlook of the Consumer Discretionary sector is likely due to
the strengthening U.S. economy and the continuing low interest rate environment. This means
that Consumer Discretionary stocks are an attractive as substitutes for low-yielding fixed income
instruments and defensive equity positions. The one potential barrier to this sector’s growth is
the impending Federal Reserve rate hike that analysts predict could take place as early as
December 2015. When rates do increase it is unclear if the sector will face divesting from
investors as they may look for safer fixed income opportunities. However, due to a likely short
term raise of 0.25% the risk of investor fleeing to fixed income is unlikely.
Consumer Discretionary stocks have benefited from increased consumer confidence since a low
in 2008 (Appendix Exhibit A). Tracking consumer confidence has been personal savings, which
peaked between 2012 and 2013. This peak can likely be contributed to the trough of 2008 when
personal savings bottomed out due to the financial crisis (Appendix Exhibit B). Currently
personal savings have seen fairly steady levels which may support the opinion that the American
way of spending has returned now that consumers can once again afford it. Wages also support
the ability of increased consumer spending as they have continued to grow since 2006 (Appendix
Exhibit C). Although wage growth has been slow and looks as though it may moving towards a
parabolic trend, when combined with increased consumer sentiment and level personal savings
Consumer Discretionary stocks can expect an environment conducive to growth.
Subsector Review and Outlook
During the third quarter, the Consumer Discretionary sector faced an average weighted return of
-7.49% and a weighted median return of -2.49%. All sub-sectors faced declining returns except
Internet Catalog Retail with a quarter three return of 2.2%. Auto Components and Automobiles
faced the smallest decline of only -1.1% and -1.8% respectively. Alternatively, Multiline Retail,
Textiles, Apparel & Luxury Goods, and Specialty Retail stood out as notable underperformers,
declining -17.6%, -10.2%, and -9.5% respectively. The remaining subsectors realized returns
between -4.8% and -8.8%. An interesting observation from the table below is that Media is the
only subsector to be classified as “aggressive” based on its beta relative to the S&P 1500. The
rest of the subsectors are considered “neutral” with respect to market movements.

6. 6
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Subsector
Weight in S&P
1500
Q3 Total
Return
Subsector
Beta
Classification
Auto Components 0.42 -1.1 1.44 Neutral
Automobiles 0.61 -1.8 1.1 Neutral
Household Durables 0.62 -5.8 1.21 Neutral
Leisure Products 0.16 -8.6 1.13 Neutral
Textiles, Apparel & Luxury Goods 1 -10.2 0.78 Neutral
Hotels, Restaurants & Leisure 1.89 -8.8 0.86 Neutral
Diversified Consumer Services 0.12 -7.9 1.24 Neutral
Media 3.03 -7.7 1.31 Aggressive
Distributors 0.13 -4.8 0.94 Neutral
Internet & Catalog Retail 1.76 2.8 1.33 Neutral
Multiline Retail 0.61 -17.6 1.04 Neutral
Specialty Retail 2.71 -9.5 1.07 Neutral
Source: S&P, FactSet, and Dragon Fund estimates
Note: the beta calculation is based on monthly subsector returns for the past 3 years relative to
the S&P 1500. The Cyclicality classification is based on whether the beta is statistically
significantly below 1 (Defensive), indistinguishable from 1 (Neutral), or significantly above 1
(Aggressive).
Valuation
The two graphs below contrast time-series variation in forward P/E ratios and long-term earnings
growth estimates across the two subsectors that we felt were most attractive for future
investments; Household Durables and Textiles, Apparel & Luxury Goods. The remaining
comparative charts for the other industries in the sector can be found in the appendix (Appendix
Exhibit D).
5-yr historical median subsector NTM P/E multiples and long-term earnings growth estimates

7. 7
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Source: FactSet, Dragon Fund estimates based on current S&P 1500 constituents

8. 8
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Household Durables and Textiles, Apparel & Luxury Goods are both attractive due to their
above sector-average long-term earnings growth rate. However, what makes Household Durables
stand out as more attractive is its below sector-average multiple. Although Textiles, Apparel &
Luxury Goods are trending towards a lower P/E multiple it does not trail the sector multiple like
Household Durables has done in recent history; tracking just below the sector since 2013.
Revisions in earnings growth estimates, displayed in the table below, show that analysts are
looking favorably at the majority of the industries in the Consumer Discretionary sector. The
majority of the industries received very slight revisions aside from Hotels, Restaurants & Leisure
and Distributors, which saw the greatest revisions up 0.041 and 0.027 from April to September
respectively.
In comparing Household Durables and Textiles, Apparel & Luxury Goods, Textiles, Apparel &
Luxury Goods saw the larger revisions. An explanation for the positive revisions of Household
Durables and Textiles, Apparel & Luxury Goods is the positive outlook in macro performance
drivers. Although generally positive, these revisions have not ultimately been significant for the
Consumer Discretionary sector, so they do not hold much weight when determining future
investment growth opportunities.
Short-term earnings growth measured as 2015 consensus EPS versus 2014 EPS actuals
(medians)
Source: FactSet consensus, Dragon Fund estimates
Valuations of the industries in the sector can be influenced by the actions of insiders and short
sellers who may be more informed of drivers and catalysts for these areas. The table below
summarizes the recent activity in each industry with regards to short positons.
Month Auto Components Automobiles Household Durables Leisure Products
Textiles Apparel &
Luxury Goods
Hotels Restaurants
& Leisure
Apr-15 1.093 1.178 1.139 1.080 1.092 1.149
May-15 1.056 1.202 1.141 0.978 1.088 1.161
Jun-15 1.055 1.178 1.131 0.978 1.075 1.162
Jul-15 1.055 1.202 1.156 0.979 1.086 1.173
Aug-15 1.065 1.196 1.145 1.010 1.086 1.184
Sep-15 1.065 1.194 1.141 1.014 1.100 1.190
Month
Diversified
Consumer Services
Media Distributors
Internet & Catalog
Retail
Multiline Retail Specialty Retail
Consumer
Discretionary
Apr-15 1.038 1.095 1.075 1.071 1.101 1.094 1.102
May-15 1.045 1.112 1.074 1.043 1.096 1.101 1.106
Jun-15 1.045 1.111 1.074 1.041 1.090 1.110 1.109
Jul-15 1.045 1.052 1.073 1.043 1.089 1.109 1.109
Aug-15 0.916 1.026 1.102 1.074 1.099 1.097 1.104
Sep-15 0.914 1.025 1.102 1.074 1.071 1.096 1.106

9. 9
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Equally-weighted average short interest scaled by market capitalization expressed in percent
Month
Auto
Components
Automobiles
Household
Durables
Leisure
Products
Textiles Apparel
& Luxury Goods
Hotels
Restaurants &
Leisure
Apr-2015 4.046 6.372 7.526 8.805 7.351 5.380
May-2015 3.820 6.920 7.327 8.928 7.306 5.715
Jun-2015 4.254 7.137 7.512 9.113 7.392 5.907
Jul-2015 4.571 7.599 7.293 9.405 7.675 6.408
Aug-2015 4.631 7.083 6.945 8.522 7.455 6.212
Sep-2015 4.994 7.036 7.210 8.235 7.846 6.511
Source: Short interest from U.S. stock exchanges, Dragon Fund estimates
The Consumer Discretionary sector has seen a good amount of movement in short interest. There
have been a few industries whose short interest has increased a significant amount, most notably
Diversified Consumer Services and Internet and Catalog Retail. Household Durables has actually
seen its short interest decrease over the past six months which signals that investors are more
optimistic on performance going forward while Textiles have seen a slight increase over the
same time.
Month
Diversified
Consumer
Services
Media Distributors
Internet &
Catalog Retail
Multiline
Retail
Specialty Retail
Consumer
Discretionary
Apr-2015 5.366 6.541 2.585 7.937 10.384 8.205 7.002
May-2015 5.162 6.051 2.910 8.288 10.520 8.358 7.043
Jun-2015 5.762 5.914 3.445 8.780 11.032 9.209 7.425
Jul-2015 6.033 5.371 3.573 9.008 11.534 9.563 7.608
Aug-2015 6.625 5.062 3.420 9.868 10.764 8.896 7.306
Sep-2015 7.395 5.616 3.675 9.865 11.158 9.332 7.663

10. 10
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Macro Trends and Catalysts: Supporting Household Durables
Housing Starts
Source: FactSet
Housing Starts measures the beginning of new residential housing projects in a particular month.
If more homes are being built it is foreseeable that more homes will be bought by new first time
homeowners. This impacts the Household Durables industry directly, since the more
homeowners there are, the more demand for house hold products. The Household Durables
industry derives much of its growth from increases in the housing market and these increases can
be measured through growth in Housing Starts.
Housing starts have been on a steady upward trend since bottoming out just after the 2008 crisis.
According to the Goldman Sachs housing starts data, (see Appendix E) there is still demand for
new construction. This in turn will most likely translate to more development in the future and
will provide further growth in Housing Starts. As mentioned above as Housing Starts increase, so
do the number of homeowners and these new homeowners will help fuel growth in the
Household Durables industry. (Cahill) This growth could be hampered by the tightening on
lending as Brad Sorensen of Charles Schwab notes in his Sector Rating. The tight lending would
limit those able to purchase homes stunting ownership numbers. While lending remains tight
there are hopeful signs of easing. (Sorensen)

11. 11
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Source: FactSet
Interest rates play a big role in determining the demand for the housing market. Lower rates
entice more people to purchase homes while high rates can make renting look more attractive.
This is due to the fact that the majority of mortgages are 30 years, so the 30 year treasury rate is
taking as a base and acts as the leading indicator for mortgage rates.
The low rate environment has been a great catalyst for the housing market. With analysts
expecting the FED to hold off on a rate hike until 2016 favorable financing appears apparent in
the near future. In fact it would be reasonable to expect housing demand to stay at high levels,
due to the favorable financing available to homeowners.

12. 12
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Source: FactSet
The unemployment rate measures the number of individuals who are willing and able to work
but are currently unemployed. The Federal Reserve’s target unemployment for the economy is
around 5%, a mark that the economy is currently meeting at 5.2%. Unemployment is an
important measure of the performance of the Household Durables industry and the Consumer
Discretionary sector as a whole. If people are unemployment they will avoid making luxury
purchases to save for staple purchases. This is especially true for the Household Durables
industry as the products in the industry often have large price tags and are often coupled with
larger purchases.
Unemployment has been on a downward trend since its apex in 2009/2010. The length of time
unemployed workers are out of work is also on the decline as well however it is still not
anywhere near pre-crisis levels. With more consumers employed, the level of purchases in the
Consumer Discretionary sector and more specifically the Household Durables industry should
increase.

13. 13
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Household Durables: Trend Towards Innovative and Price Competitive Home Furnishings
According to an S&P Capital IQ industry report, most manufacturing retailers of home
furnishings are working to cut costs and streamline processes. They are looking to take
advantage of an area that has seen a lot of growth recently. The market for bedding most
specifically was “the most frequently category of 2014.” (Capital IQ) Sales in the area have
increased 8.3% according to Furniture Today. They are looking to cut the prices by moving
some facilities to lower cost countries and importing more of their products. Low energy prices
combined with the strengthening dollar have made shipping goods from overseas much more
cost effective. This allows companies to benefit from cheaper global labor. Interestingly as
Capital IQ notes, there is a push from some manufacturers to bring manufacturing plants back to
the United States. This effort could pick up steam if overseas manufacturers like China become
more expensive as they develop. (Capital IQ)

14. 14
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
References
 Cahill, Michael. "Economic Outlook." Dragon Fund Lecture. LeBow College of
Business, Philadelphia. 6 Oct. 2015. Lecture.
 "Industry Surveys-Household Durables." Black Board Learn. S&P Capital IQ, 1 Aug.
2015. Web. 20 Oct. 2015. <https://learn.dcollege.net/bbcswebdav/users/dd79/External
research/consumer_discretionary_sp_household_durables_1508.pdf>.
 "Industry Surveys-Textiles, Apparels, & Luxury Goods." Black Board Learn. S&P
Capital IQ, 1 Apr. 2015. Web. 20 Oct. 2015.
<https://learn.dcollege.net/bbcswebdav/users/dd79/External
research/consumer_discretionary_sp_textiles_apparel_luxury_goods_1504.pdf>.
 Sorensen, Brad. "Consumer Discretionary Sector Rating: Marketperform." Consumer
Discretionary Sector Rating: Marketperform. Charles Schwab, 10 Sept. 2015. Web. 20
Oct. 2015. <http://www.schwab.com/public/schwab/nn/articles/Consumer-discretionary-
sector>.

15. 15
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Appendix
Exhibit A: Consumer confidence (FactSet)
Exhibit B: Personal Savings (FactSet)
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15
20
40
60
80
100
120
140
103.04
Monthly
% VWAP: High: 111.94 Low : 25.30 Chg: 21.00%
Consumer Confidence Index, 1985=100, Sa, Index - United States
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15
2
3
4
5
6
7
8
9
10
11
12
4.60
Monthly
% VWAP: High: 11.00 Low : 2.50 Chg: 76.92%
Personal Income, Personal Saving As A Percentage Of Disposable Personal Income, Percent - United States

16. 16
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Exhibit C: Wage Growth(FactSet)

17. 17
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Exhibit D: 5-yr historical median subsector NTM P/E multiples and long-term earnings growth
estimates
5.0
10.0
15.0
20.0
25.0
Automobiles
Automobiles LTG Consumer Discretionary LTG
Automobiles P/E Consumer Discretionary P/E
5.0
10.0
15.0
20.0
25.0
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Auto Components
Auto Components LTG Consumer Discretionary LTG
Auto Components P/E Consumer Discretionary P/E

18. 18
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
5.0
10.0
15.0
20.0
25.0
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Leisure Products
Leisure Products LTG Consumer Discretionary LTG
Leisure Products P/E Consumer Discretionary P/E
5.0
10.0
15.0
20.0
25.0
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Hotels, Resturants & Leisure
Hotels, Resturants & Leisure LTG Consumer Discretionary LTG
Hotels, Resturants & Leisure P/E Consumer Discretionary P/E

19. 19
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
5.0
10.0
15.0
20.0
25.0
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Diversified Consumer Services
Diversified Consumer Services LTG Consumer Discretionary LTG
Diversified Consumer Services P/E Consumer Discretionary P/E
5.0
10.0
15.0
20.0
25.0
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Media
Media LTG Consumer Discretionary LTG
Media P/E Consumer Discretionary P/E

20. 20
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
5.0
10.0
15.0
20.0
25.0
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Distributors
Distributors LTG Consumer Discretionary LTG
Distributors P/E Consumer Discretionary P/E
5.0
10.0
15.0
20.0
25.0
30.0
35.0
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Internet & Catalog Retail
Internet & Catalog Retail LTG Consumer Discretionary LTG
Internet & Catalog Retail P/E Consumer Discretionary P/E

21. 21
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
5.0
10.0
15.0
20.0
25.0
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Specialty Retail
Specialty Retail LTG Consumer Discretionary LTG
Specialty Retail P/E Consumer Discretionary P/E
5.0
10.0
15.0
20.0
25.0
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Multiline Retail
Multiline Retail LTG Consumer Discretionary LTG
Multiline Retail P/E Consumer Discretionary P/E

22. 22
The Dragon Fund
Consumer Discretionary update October 2015
Joshua Settlemire, Sara Golshahr
Keith Mac Kenzie, Michaael Cavalieri
Exhibit E: Goldman Sach’s Housing Outlook (Cahill)