Wall Street watches for where rebates go

Give them cash, and they will shop.

That's the idea behind the government's save-the-economy tax rebates, which are starting to hit checking and savings accounts of cash-strapped consumers.

Wall Street has its own opportunistic take on the 2008 economic stimulus plan: Where they shop could add to a stock-price pop.

A hefty $117 billion in rebates will be doled out between now and mid-July, says Merrill Lynch.

That's big bucks — found money that will need to find a home.

Some folks (23%) will save the cash, a Citigroup survey found. Others (34%) will pay bills or reduce debt. But some of the dough (up to $1,200 for married couples and $300 extra for each kid) will be spent.

Only 11% said they plan to buy consumables or general merchandise. (However, the National Bureau of Economic Research says the average household spent 20% to 40% of rebates back in 2001.)

Tens of billions of dollars will likely end up in cash registers of U.S. retailers. But which retailers will ring up the most sales, and which stocks will benefit most?

Those are questions Wall Street, in its never-ending quest to ferret out stock market winners, has been busy trying to answer. Where rebate recipients shop — and how much they spend — could mean an earnings boost and potential stock price gains for the companies that benefit most from this one-time spending boost.

It seems like every Wall Street shop, money manager and stock analyst is spotlighting potential winning tax-rebate plays.

One guidepost, or template, for investors is spending data from the 2001 tax rebates doled out in the last recession. Consumer spending in the two-month period that summer rose at a 5% annual rate, which at the time was the strongest pace in nearly a year, Merrill Lynch economist David Rosenberg noted in a report titled, "Where will the tax rebate be spent?"

Given the economic duress back in 2001, however, big-ticket items, such as cars, air travel, home improvement, furniture and pleasure boats, got little if any boost.

"The 2001 rebate was spent on small stuff," Rosenberg noted.

Stuff like movies. Books. And eating out at inexpensive restaurants.

"Destressing activities that diverted attention away from the recession," according to Rosenberg. Other major beneficiaries were staples, such as drugs and sundries.

With consumers' wallets pinched from high gas prices, falling home prices and job losses, they are again more likely to buy less-expensive everyday items rather than higher-price items they covet but don't need, notes Citigroup analyst Deborah Weinswig.

"We expect most consumers who decide to spend their checks to purchase lower-margin food and consumables (rather than) discretionary items," Weinswig noted in a recent report to clients.

Weinswig expects discounters, clubs and food retailers to benefit most. She expects Wal-Mart to take in a large chunk of the rebate-generated purchases, as it did in 2001, when about 25% of rebate checks were spent at Wal-Mart, which provided in-store check cashing.

This year, the largest U.S. retailer is again offering to cash rebate checks for free to generate store traffic. Wal-Mart has also cut prices on staples, such as shampoo, juice and sports drinks, to give shoppers an incentive to spend their rebates at its stores.

Other retailers, including grocery chain Supervalu, Sears, office supply giant Staples and grocer Kroger are also offering discounts and promotions to lure shoppers.

Wedbush Morgan Securities has pinpointed a handful of stocks it thinks will benefit from rebate spending. The firm's retail analyst Joan Storms, for example, likes low-price retailers Big Lots and 99 Cents Only. Footwear analyst Jeff Mintz expects many consumers to save their rebate for back-to-school shopping later this summer. His top pick: Skechers, makers of trendy yet reasonably priced footwear. GameStop, which sells popular video game software that sell for under $30, and games maker Electronic Arts will also benefit.

But don't expect the rebate impact to be long-lasting, says Mike Petroff of Heartland funds: "It will be a temporary phenomenon, a short-term blip."