How To Invest In Retail Stocks

NEWS: Oil falling 99 cents and bullish guidance from Wal-Mart was enough to send the stock market modestly higher for the session. The Dow closed with a gain of 82 points or 0.7% and is trading right on the 50-day moving average again. The S&P 500 added 7 points or 0.5% and is also just above its 50-day moving average. The NASDAQ was the big winner, rallying 15 points or 1.0%. The tech-heavy index has been an outperformer as of late and is now trading at a fresh 2-month high, above all major moving averages.

THE BOTTOMLINE: The major indices continue to chug along and are at the mercy of what happens with the price of oil and the financials. Today oil fell and financials rallied, so all was good at Wall and Broad. But, do not get overly excited because as you should know by now, this market can turn against you very quickly. As I have been telling many of my clients over the last week, the recent action in the market has not changed our investment strategy completely. However, the bottoming process we have experienced along with the strength in sectors such as technology and medical devices, and finally the pullback in commodities has had an effect on my thinking. Instead of taking the “defensive” portfolio strategy which has helped us blow the doors off the US stock market in the first six months of the year, I will now move to a “neutral” strategy.

Not to give away all my “secrets” - HA, but the neutral strategy will involve more exposure to a broad range of sectors such as technology, transportation, and even some financials at the right time. To do this there must be money pulled out of areas to create cash for the new investments. The sectors that will move from overweight back down to neutral are the commodities and any anti-US Dollar investments. This does not signal the end of the commodity run, but it is time to move from overweight to neutral because there are now more opportunities for your money.

INVESTING IN RETAIL STOCKS

NEWS: Investing in the retail sector is not the normal run of the mill strategy you can use for utilities or energy. When the utilities or energy sectors move higher it typically involves a majority of the stocks that make up the sector moving in unison. The same cannot be said for the retail stocks because each company varies greatly in their business model and fashion they offer at varying price points. This is why it takes a little extra research when you decide to delve into the investment world of retail stocks.

THE BOTTOMLINE: Today the S&P Retail Index (RLX) gained 2.1% and is not far from the 2-month high it hit earlier this week. The run up today was led by solid earnings and upbeat guidance from Wal-Mart (WMT) before the bell. The stock did not have a great day, but did eke out a gain of 0.4%. Believe it or not, the HOLDRS Retail ETF (RTH) is up 3% on the year versus a drop of 12% for the S&P 500.

So should investors forget about picking stocks and concentrate on the retail ETFs that are available? You could if you prefer zero company-specific risk, but I would suggest taking the route of individual stocks if it fits into your risk tolerance. The winners this year have been across the board with discounters, WMT and TJX Companies (TJSX), gaining 25% and 22%, respectively. Mid-west teen retailer Buckle (BKE) is up 47% and specialty retailer Urban Outfitters (URBN) has risen 30%.

If you think it is as easy as picking a stock within a niche retail sector, think again. The warehouse clubs is a great example; BJ’s Wholesale Club (BJ) is up 22% this year versus a loss of 4% for Costco (COST). Really what it comes down to is the valuation of the retailer and even more importantly the outlook for their products. When looking at the warehouse clubs, they both carry similar products, but obviously BJ is doing something COST is not. When analyzing valuation, both trade at similar levels now, but earlier this year BJ was the more attractive investment based on the fundamentals. This may sound like a lot of work just to pick one stock for your portfolio, but if you choose the right retailer it can be a major boost to your overall performance.

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