Go Cheap or Spend Lavishly?
The retail sector is showing some strong results as pent-up consumer spending is showing some encouraging signs of release. Yet, as a retail sector investor, do you stick with the discount and big-box stores, or should you invest your capital in high-end retailers?
The key is to buy the retail stocks that show growth along with the economic recovery, whether they are big-box stores, discounters, or luxury retailers. Investors want growth.
On the cheap end, I favor the leading discount bellwether retail stocks, as I feel consumers will continue to look for bargains regardless of the improving market conditions.
This includes large-cap stocks Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST).
For added growth, you should look at the smaller discount companies in the retail sector.
With superior growth to Costco, small-cap PriceSmart, Inc. (NASDAQ/PSMT) operates 29 warehouse clubs in 12 countries in Central America and the Caribbean.
A big winner last week was large-cap Dollar General Corporation (NYSE/DG), an operator of over 10,000 stores across 40 states. Dollar General beat on earnings for the fifth straight quarter. The stock has reasonable valuation and above-average, long-term price appreciation potential, a positive for investors looking at the retail sector. Currently, Dollar General is up nearly 50% from its 52-week low.
In the low-end area, I like Dollar Tree, Inc. (NASDDAQ/DLTR) and Family Dollar Stores, Inc. (NYSE/FDO).
And with the housing market ramping up, I expect spending in the retail sector to continue to increase, especially on non-essential goods and services reflected by durable goods. My favorites in the retail sector remain the discounters and big-box stores. The big-box stores are now selling a broad range of electronics and are adding to their product line, which offers consumers a one-stop place for shopping and offers companies a higher revenue flow.
On the other end of the spectrum, I also like the luxury stocks, but some companies are facing some spending issues.
One of the top high-end retailers at this juncture is Michael Kors Holdings Limited (NYSE/KORS), which traded at a new 52-week high last Thursday, as the stock continues to ratchet higher, driven by strong results. Michael Kors beat earnings by 122% and 37.5% in the fiscal third and fourth quarters.
Tiffany & Co. (NYSE/TIF) and Coach, Inc. (NYSE/COH) are high-end luxury stocks that are well down from their 52-week highs but that are perhaps ripe for some oversold buying at the sale prices.
As I’ve said in the past, the key to investing successfully in the retail sector is to seek out a company that offers some sort of niche or a product that differentiates it from its competitors. I like retailers that may currently be in the dumps with investors, but have strong brand awareness in the retail sector.