As investors hunt for bargain stocks with strong growth potential, many are taking a closer look at retail stocks – and for a good reason.
As of October, U.S. retail stocks have rallied hard, despite the sharp curb on consumer spending. The top retailing shares have improved upwards approximately 103%, according to a recent report by Capital IQ. In fact, they have advanced far more than the S&P 500, which climbed 17% during the same period.
Ann Taylor, Dillard’s and Pacific Sunwear were among those retailers with increases of 200% and above. Kirkland’s, the home décor store featuring framed art, mirrors, wall décor, candles and lamps, saw its stock jumped 438%.
Among Capital IQ’s total list of 111 major US retailing companies, only six stocks were in the negative at the end of the third quarter.
Experts say certain retail stocks will continue to see positive movement next year as long as consumer spending continues to improve. Companies that can figure out what people really want will see the most gains in their stock prices.
The stores most likely to pull ahead of the pack in 2010 will be those with earnings and sales that exceed analysts’ expectations, according to Bob Keiser, senior director with the Market, Credit and Risk Strategies group at Standard & Poor’s.
Investors should pay close attention to how retailers do in this fourth quarter, which will include sales from their three busiest shopping seasons — Halloween, Thanksgiving and Christmas. “There is a limited pool of consumer dollars out there. It’s going to be a very competitive, feeding frenzy to grab a large portion of those dollars,†says Keiser.
A number of retailers sent strong signals that they are on the right track. Aeropostale (ARO), American Eagle Outfitters, Gymboree
Most analysts say that picking profitable retail stocks for 2010 will be more challenging. “In 2009 you could close your eyes and pick any retail stock. There was more growth opportunity because stocks were so heavily discounted. Now more traditional analysis has to be done to show how the growth unfolds and how much market share they have,†says Timothy Fidler, senior vice-president, portfolio management, Ariel Capital Management.
There are, however, pockets of retail markets where investors remain bullish, says Eric McKissack, CEO, Channing Capital Management. Investors are being drawn to specialty stores and niche stores with mass market. For instance, people are starting to warm up to
forwp-incontent-custom-banner ampforwp-incontent-ad3">As for growth stocks, McKissack says that he is hearing a lot of chatter about Whole Foods Market, as people become more health conscience; and J. Crew, which Michelle Obama has made popular by sporting its wares. McKissack says that some analysts are also recommending the GAP Inc. The retailer has implemented a turnaround mix of traditional apparel that seems to have lured customers back.
Investors looking for strong retailers should be closely examining quarterly same-store sales looking for top line growth. Another indicator to monitor: look for retailers that beat analyst’s estimates for the all-important fourth quarter. Companies that exceed estimates will be in the best position to capitalize on any consumer spending increases in 2010.
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