3 retail stocks to check out now

These companies stand to gain from increased consumer spending.

By InvestorPlace Aug 21, 2013 11:36AM

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Couple Out Shopping © Fuse/Getty ImagesBy Jeff Reeves


While consumer spending was a big uncertainty a few months ago because of hangover from the fiscal cliff debacle and a payroll tax increase, there are a number of improving data points that suggest spending is quite strong.


In July, U.S. consumer spending rose at its fastest pace in seven months. Also, retail sales grew for the fourth consecutive month, with a 0.3% advance after a 0.4% increase in June.


As the American economy continues to get its act together, these numbers will continue to move higher, too … and that means investors looking to play the retail sector should load up on related stocks sooner rather than later.


As consumers continue to increase spending, a strong back-to-school shopping season coupled with a great holiday run could push a number of retail investments sky-high.


Here are three such picks to consider now before the seasonal shopping spree kicks off in the months ahead:


Macy's

Macy's (M) was flying high up until a few days ago, when it reported earnings and saw shares sell off sharply as a result.


But the department store giant remains up 15% year-to-date in 2013 even after the declines, and the brief pullback makes for an attractive opportunity in Macy's stock.


Remember, Macy's missed earnings expectations but was still growing; its 7.5% earnings per share bump missed the 16% Wall Street was looking for. Also a big disappointment was a same-store sales decline of 0.8% vs. expectations of 2.3% growth.


However, Macy's is still expecting 2% to 3% growth in same-store sales this year. It remains the strongest of the mall retailers and pays a decent 2.2% dividend to boot. After the selloff, Macy's is now trading for a fairly attractive forward price-to-earnings ratio of about 10 and could be a strong long-term buy at current levels.


There's a risk sales will continue to soften, but based on a long history of efficient management and growth, the latest miss might have been a one-time event -- and a good buying opportunity before the run continues. After all, Macy's is up 160% since January 2010 -- more than triple the S&P 500 ($INX). This retail stock has consistently outperformed, and that's worth something.


L Brands

L Brands (LTD) -- formerly Limited Brands -- operates Victoria's Secret, The Limited, and Bath & Body Works among other mall favorites.


The third quarter is historically a very quiet time of year for the company as it prepares for its big holiday shopping extravaganza, but L Brands stock has been on a tear lately. Specifically, while the S&P 500 has lost about 3% in the last month, LTD stock has tacked on more than 12%.


That performance is thanks to strong same-store sales numbers in July that showed 3% growth, and total sales growth of 4.4%. As a result, L Brands raised guidance for the quarter, and shares rallied strongly.


Most of the stores in the L Brands family aren't as reliant on back-to-school trends, but momentum into the fall is always a good thing considering the crucial holiday sales season that's just around the corner.


L Brands is up 25% year-to-date in 2013, and has tripled since 2009.


Home Depot

While the red-hot housing market is showing signs of slowing down, home improvement retailer Home Depot (HD) continues to hold promise.


Part of that is scale, because its 2,250 locations give it a mainline into consumer spending trends. But it's also the positioning that allows Home Depot to do well even if the initial push in housing is past. That's because families in new homes (or rather, families in new existing homes) frequently spend a lot of money over the first few years painting bedrooms or replacing appliances or picking out new light fixtures.


Thus, it's no surprise to see Home Depot stock up 22% in 2013 to outperform the market even as big-name homebuilders like Toll Brothers (TOL) and PulteGroup (PHM) are actually sitting on a loss.


Builders benefited with a massive run up in stock on the initial boom, but Home Depot has seen sales steadily improve and stay firm. That makes it one of the best retail stocks out there -- and perhaps the only stable housing play now that the biggest gains for real estate are in the rear-view.


Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor's Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the stocks named here.


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