Market volatility has noticeably increased over the last 10 or so trading days. After grinding higher for months with low volatility, equities have seen numerous triple-digit gains and losses, as well as major intraday reversals in the past two weeks. The market seems a bit bipolar as equities seem to be drawn like a magnet to breaking through their 2007 highs on the DJIA and S&P 500 while remaining susceptible to major selloffs on any negative news (Italian elections, Fed comments, and the like). I believe an investor has to be nimble here. I also believe it is necessary to have certain investing rules to guide your actions in managing a portfolio while not being so rigid not to take advantage of special situations that might violate your overall philosophy.
As regular readers of my column know, I am more pessimistic about the prospects for consumer spending than the consensus. The expiration of the payroll tax holiday as well as high gas prices should have some significant impact to spending, which I don't think can be assessed accurately yet. I am deeply underweight consumer discretionary stocks as a result. However, I am keeping stakes in two retailers that I believe will be able to navigate this headwind.
Macy's (M): Since Ron Johnson took over as CEO of J.C. Penney (JCP), it has been a godsend for shareholders -- shareholders of Macy's and other retailers that have gained sales and market share in the aftermath of the many changes Johnson instituted since taking the reins. On the other end of the spectrum, Macy's CEO Terry Lundgren is simply one of the best merchants in retailing. The company recently reported earnings from the all-important fourth quarter. The report beat earnings estimates and met expectations on the top line as well. Sales grew better than 7% year over year, despite Hurricane Sandy. Macy's is going for less than 11x forward earnings and provides a yield of 2%. I am happy to hold the best-run department store chain in the space and would love to add to my shares if the decline I see coming for the overall market happens.
Vera Bradley (VRA): I continue to hold this women's accessories retailer despite its disappointing performance the past few months. I believe its growth prospects are underappreciated by the market at these levels. The company should post revenue gains for all of 2012 of just over 15%, and analysts expect mid-double-digit revenue gains in 2013 as well. VRA sells at just over 13x this year's expected earnings and the stock sports a five-year projected PEG below 1 (0.86). The company raised guidance for the fourth quarter in mid-January. I am looking forward to fourth quarter results and management's commentary when it reports earnings March 14.