11/25/2013 6:45 PM ET|
10 retail stock bargains for Black Friday
The holiday season is generally the most profitable time of the year for retailers, but Wall Street is worried about disappointing sales this year.
Investors will be closely watching the holiday hysteria that's soon to overtake the stores and shopping malls of America, especially as Wall Street fears the coming holiday season could be a dud for retailers.
Analyst expectations are skewed to the negative, with some suggesting this holiday season could be on track for its worst performance since 2008. Morgan Stanley (MS) said last month that weak holiday sales could force stores to begin promoting their merchandise more intently.
The day after Thanksgiving is the unofficial kickoff of the holiday shopping season, but retailers have begun to pull forward their opening times to the Thanksgiving holiday itself as they jockey for a head-start on the competition. With retailers on edge, the back-and-forth is already getting testy as companies like Wal-Mart (WMT) tussle to match rivals' Black Friday deals a week early.
The holiday season is generally the most profitable time of the year for retailers, but it also has a broader impact on the direction of the stock market. The department stores, apparel shops, and other retailers that make up the consumer discretionary sector of the S&P 500 index ($INX) contribute 12.5 percent of the total market capitalization of the index, making it the fourth-largest sector of the market as of Thursday, according to S&P Capital IQ.
The consumer discretionary sector of the S&P 500 has been going gangbusters this year, climbing 36.6 percent, while the Select Sector SPDR-Consumer Discretionary exchange-traded fund (XLY) is similarly up 36.7 percent, hitting a record earlier this month. That outperformance has supported the broader S&P 500, which is up 26.5 percent this year.
Nonetheless, the bulk of the sector's gains came in the first half of the year, before the outlook began to deteriorate. And investors got a taste of what could be in store for the rest of the year when a number of prominent retailers reported disappointing profit outlooks this past week.
On an earnings call this week, this is how Target (TGT) chief executive Gregg Steinhafel described customer behavior: "They want to stay within a tight, very tight household budget, which is seeing additional pressure from this year's payroll tax increase." Shares lost nearly 5 percent for the week.
Perpetually struggling department store J.C. Penney (JCP) said it expects a sales boost this holiday season as it returns to a promotional strategy. But for the most part, retailers including Dollar Tree (DLTR), GameStop (GME) and Abercrombie & Fitch (ANF) gave dour outlooks in their earnings reports.
However, all of these jitters aren't necessarily a sell signal. Sam Stovall, chief equity strategist at S&P Capital IQ, points to the old Wall Street proverb that you "purchase straw hats in the winter and overcoats in the summer." That's one way of saying that you should buy when there's a bargain.
"Retailers have their strongest period in March, yet December is their weakest month," said Stovall, noting data that goes back to 1990. He adds that all of this suggests, "If you are looking to pick up retail stocks, do so in December because historically that's when they have their weakest returns."
Given that outlook, he sees 10 stocks in the consumer discretionary sector that qualify as bargains at the moment, including some of the very stocks that are expecting downbeat holiday results. They include: Advance Auto Parts (AAP), AutoNation (AN), Bed Bath & Beyond (BBBY), Carmax (KMX), Nordstrom (JWN), PetsMart (PETM), Ross Stores (ROST), Staples (SPLS), Target, and Urban Outfitters (URBN).
That may reflect one aspect of the holiday season: the retailers that win and lose are increasingly fragmented, says Robert Pavlik, chief market strategist at Banyan Partners. He suspects higher-end stores like Macy's (M) and Nordstrom will hold up well, while lower-end retailers such as Wal-Mart and Target will have a tougher time.
"It's more of a rifle type of approach, and not a shotgun approach. You have to be keyed into the right areas," he said.
Meanwhile, historical indications suggest investors shouldn't worry retail stocks could bring down the momentum of the broader market before year-end. The S&P 500 tends to perform well between the week after Thanksgiving and year-end, averaging a gain of 1.76 percent since 1945 and 4.41 percent since 2009, according to Bespoke Investment Group. Since the end of World War II, that time of year has had positive returns 71 percent of the time.
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