No group is currently more disjointed and lacking in trend than retail. Just when you think the sector is going to fully tank, some company -- such as Home Depot (HD) or Tiffany (TIF), for instance -- comes along and shows stellar numbers. Then, when it appears consumer spending may be turning around, Abercrombie & Fitch (ANF) or Guess (GES) will lay an egg.
Trying to game any stock around earnings is difficult, but it's particularly difficult to get retail right on a consistent basis. Just when you think a blow-up will occur, the company delivers a blow-out quarter and squashes your dreams of a big payday to the downside. Positive results, moreover, have been lumpy. For instance, Williams-Sonoma (WSM) followed up a stellar quarter in May with a wretched one in August, and that brought the stock back down to Earth. What does this portend for a name such as Restoration Hardware (RH), which is due to report this week and is coming off a stunning report in June?
For some retailers, then, it is indeed a crapshoot -- but, nonetheless, important trends are taking hold for others. Amid the myriad excuses about the rapid drops in consumer spending, we're seeing strong auto sales; Home Depot says big-ticket items are selling at a brisk pace; and Signet Jewelers (SIG) has been selling very high-end merchandise over this last quarter. I grant you that, as a general rule,
So, while this sector is a tough one to trade, it is not impossible. Even given the high correlation between spending and jobs growth, wealth creation alone has trickle-down effects on the economy, especially when it comes to retail. Further, folks who are not much affected by economic downturns are likely to continue purchasing goods regardless of any macroeconomic forces.
Where am I going with this? Well, it appears that, over the holidays and into early 2015, the action will lie in high-end retail and products. Many of the trends in this group are positive and showing growth momentum, and these can be sustained through stronger buying power and price hikes that stick.
Some of these high-end names include Apple (AAPL), GoPro (GPRO), Deckers (DECK), Ralph Lauren (RL), Nike (NKE), Tiffany (TIF), Steven Madden (SHOO) and VF Corp. (VFC). For the most part, the products produced by these companies boast strong and growing margins that may not be vulnerable during a marked-down holiday period. In other words, customers will buy products regardless of any discounts. That is sustainability.
Other names that should hold up well include Costco (COST), Home Depot, Nordstrom (JWN) and Macy's (M). One retailer to which nobody seems to give credit, moreover, is Amazon (AMZN). Certainly the numbers do not lie, but this company has quite a large reach and will be the key driver to online holiday shopping. As Amazon goes, so goes the holiday season.
China, meanwhile, is an area of the world that's currently going unnoticed. But it is still a strong economy, and the consumer's appetite for high-end goods is insatiable there -- and many U.S. retailers are poised to satisfy that need.
Finally, automakers continue to roll and sell vehicles. CarMax (KMX) and AutoNation (AN) have been talking about pent-up demand for months, and each has been posting record numbers lately.
It is no coincidence that the charts of most of these names are in good shape and flashing buy signals.
To sum up, retail is one of the more difficult groups to play, especially against the backdrop of a worried or fickle U.S. consumer. However, this holiday season we are likely to see the biggest, best and brightest companies start to shine. Don't miss your opportunity.
