It never fails. As soon as the holiday merchandise starts piling up in retail stores, I get asked for my "top picks" in the sector. Given all the news in the retail space this week (The Gap (GPS) CEO news and the drubbings of J.C. Penney (JCP) and Sears (SHLD) stock -- the latter very deserved, but the former, not so much), there is a big appetite for getting long names in the sector for the sheer sake of doing so.
The gross negligence by some in recommending holiday themed ideas always upsets me, which is one reason I tend to wait until we get closer to the actual season before I start offering strategies. I need to see the marketing messages, the early promotions and, of course, the merchandise.
But I live in a land that wants, wants, and wants. Although it often gives nothing back in return, here are a couple names I have been discussing in recent conversations with clients and other folks.
American Eagle Outfitters (AEO), Aeropostale (ARO), Abercrombie & Fitch (ANF): The downgrade on Abercrombie this week came ahead of the Street marking down estimates in for the entire teen specialty apparel sector for the fourth quarter and 2015. Price competition was intense during the back-to-school selling season, thanks in large part to Zara and other fast-fashion players offering broader assortments at unbeatable deals. I want no exposure to teen specialty apparel retailers whatsoever.
Foot Locker (FL) and Nike (NKE): These two companies are your holiday season winners, along with Under Armour (UA). Foot Locker has a near-term catalyst: the release of the new LeBron 12 sneaker before the NBA season. Nike obviously sells the sneaker. Foot Locker stores are visually more appealing nowadays than rivals Finish Line (FINL) and Footaction, and its comps in recent quarters support that consumers concur. Nike will have a big holiday season, it is owning the sales floors at Macy's (M), J.C. Penney, its online store and its own retail stores. I also expect some form of digital initiative from managment within the next six months to cement what they are doing with new apparel products.
HanesBrands (HBI): The company will benefit from retailers really wanting to stock up on basics this holiday season, as well as initiatives by Macy's and J.C. Penney to upgrade intimate apparel. A recent European acquisition will also help the company's earnings power.
Yum! Brands (YUM): The news for Yum! Brands has been far from tasty in 2014. A China supplier issue has hammered sales in the region, while domestic price competition has been fierce. However, now may be the time to get into the stock ahead of 1) a December analyst day in which the incoming new CEO will make a presentation, 2) new marketing campaigns globally and 3) new product innovations, especially at KFC.
CSX (CSX): I like how railroads are working closer with logistics companies to facilitate commerce. CSX is set to report earnings next week. The stock has been outperforming the major indices the last month. I anticipate a strong quarter; there is more to this company than coal.
Best Buy (BBY): The company could be your positive holiday season surprise. Best Buy has a few things in its operations that didn't really exist a year ago, which should make fourth-quarter results look better: 1) ship from store for all stores, 2) iPhone mania, 3) new high definition TV shops, which is currently a hot category.