Investors were happily greeted with a surprise on Tuesday after the reporting of better-than-expected retail sales numbers that suggest the consumer spending market may be alive and well after all.
In December, the headline retail sales reading jumped 0.2%, which was above the Briefing.com estimate calling for a flat result. Even after adjusting for the volatile auto sales, the core retail sales reading surged 0.7% compared to the 0.4% consensus estimate.
The results offer some encouragement for spending this year in the retail sector and were much needed, given the recent downward guidance from several retailers.
Now, don’t get too giddy and go out and buy retail stocks at random. It’s not that easy. Investing in retail stocks at this time requires careful thought and evaluation. But with the right investments, there’s some money to be made in the retail sector.
The National Retail Federation also reported some encouraging numbers for the retail sector. Excluding auto, gas station, and restaurant sales, retail sales advanced 3.8% in November and December.
Sounds good on the surface, but there may be some underlying issues surfacing in the retail sector. About 25 of the 29 retailers that issued earnings guidance, unfortunately, offered a negative outlook. (Source: O’Donnell, J., “Holiday sales paint mixed picture for retailers,” USA Today, January 14, 2014.)
The stats put forth are non-conducive to a rally in the retail sector and, in fact, represent a troubled retail climate that is facing lower income from middle-class consumers.
Even the discounted retail sector area is showing some weakness in growth. Family Dollar Stores, Inc. (NYSE/FDO) offered a soft tone in its outlook and blamed a competitive retail sector environment.
The reality is that we need to see more jobs creation in areas that will, in turn, allow for greater spending, driving up the multiplier effect of spending in the retail sector.
Overall, I suggest that you tread carefully in the retail sector and look for stocks that have dominance in a certain niche.
You might also consider sticking with the big-box stores, such as Costco Wholesale Corporation (NASDAQ/COST) and Wal-Mart Stores, Inc. (NYSE/WMT).
I also continue to like the discount dollar stores in spite of the soft outlook from Family Dollar. Consider taking a closer look at Dollar General Corporation (NYSE/DG), PriceSmart, Inc. (NASDAQ/PSMT), and Five Below, Inc. (NASDAQ/FIVE).
If you want a speculative contrarian retail sector play in discount stores, take a look at Stage Stores, Inc. (NYSE/SSI). Stage Stores sells reasonably priced brand and private label apparel, accessories, cosmetics, and footwear for women, men, and kids. The retail network includes about 872 stores located primarily in small- and mid-sized towns in 40 states.
Chart courtesy of www.StockCharts.com
Stage Stores is a contrarian pick that has vastly underperformed the broader market. The stock is down 15.83% over the last 52 weeks versus a 24.87% advance by the S&P 500.
Alternatively, if you are looking to take advantage of the surging consumer spending outside of the U.S., you may want to consider those stocks with a presence in China, or an exchange-traded fund (ETF) like Global X China Consumer ETF (NYSEArca/CHIQ), which you can read more about in “OECD Predicts China #1 Economy by 2016; Consumer Spending to Soar.”
This article Top Stocks for Investors in an Uncertain Retail Market was originally posted at Profit Confidential