One Big Thought for the Retail Sector in 2012

 | Dec 27, 2011 | 11:20 AM EST
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In case you missed it amid frantic last-minute gift wrapping or guest entertaining during the long holiday weekend, Barron's was the latest to throw a dart at calling a revival in shares of Gap (GPS) for 2012.

One fund manager who clearly was sucking down a hearty helping of pre-holiday eggnog went so far as to say that Gap's stock could gain 50% next year. I am able to appreciate the earnings catalysts on the horizon, such as tamer cotton costs, aggressive share repurchases and same-store sales life through improved merchandising not presently being priced into the stock.  In fact, I wouldn't completely discount the possibility of Gap shares moving to the upside to conclude the fourth quarter ending January.

The company, overall, was interestingly light on inventory in the weeks preceding Christmas and the day after, despite not pulling out the big promotional guns. That may spark analysts to upgrade their depressed 4Q11 EPS forecasts. But a 50% rise in Gap's stock is pushing the boundaries of reality given company-specific and market dynamics and generally, the Barron's piece provided little in the way of aspects we didn't already know, except the hinting of a big thought on the retail sector in 2012.

The thought I now have in mind is that 2012 stands to be the year of the stock buyback and dividend hike for retailers with limited square footage growth opportunities in the U.S. and after a year of tight expense management that will have filled the cash coffers. To play the year of the retail sector cash giveaway, I need you to seek U.S. dominant businesses that are not likely to open up loads of stores and are doing what they do as well as ever before, and of course have the balance sheets to support a ramp in share repos and dividend payout ratios.

Look at Macy's (M).

Most sell-side (those brokerage analysts that you see on television) notes that I have read on 2012 suggest Kohl's (KSS) will be the share repurchase king from the department store sector. But I want all the RealMoney faithful allocated to retail's best in breed, which I characterize as companies that are stealing market share in both brick-and-mortar and online platforms. I want you to be exposed to the high end. Macy's offers these things (Bloomingdales does not receive the proper attention in Macy's valuation) at a submarket P/E multiple of 10x forward earnings and, most notably, a balance sheet that will end 2011 having the most cash in its history (previously that was $1.7 billion at the end of 2009 and this time it could be north of $2 billion).

It's largely anticipated by Wall Street that Macy's will announce a major share repurchase program in 2012. The company began to repurchase its stock in 3Q11. And investors are waiting on for another dividend increase. Macy's doubled its divided in 1Q11 after slashing it by 62% at the beginning of 2009.  My view is that while both of these events are anticipated, the Street has in no way factored them into their EPS estimates or price targets on the stock. All arrows point to these events unfolding in the very near future, hence the enthusiasm in this piece in encouraging you to get into the stock ahead of the crowd and with it being off its 52-week high.

Now, here is a stock market nugget to be tossed around to raise your cool factor at the New Year's Eve party:

•        The S&P 500 has risen in the final 17 months in 13 of the past 15 presidential election years since 1950, according to the Stocktrader's Almanac.

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