Don't abandon retail stocks. They just might be getting their groove back.
This morning, two terrific retailers -- Ross Stores (ROST) and TJX (TJX) -- caught downgrades because of valuation. Specifically, the research firm Canaccord took these two stocks to Sell ratings because the expectations are said to be too high and shareholders could be disappointed when the numbers come out.
I say: Hold your horses.
First of all, the climate has become just about perfect for retail, and I'm just referring to the chill in the air. I mean that, with consumer sentiment from the University of Michigan and Reuters through the roof -- clocking at an astounding 89 -- you don't want to cut back on any retail holdings you have. Consumer sentiment, which I thought would be dealt a bad blow because of Ebola fears, has turned out to be extremely robust. I believe this is because of the shocking decline in gasoline prices.
I think that this gasoline story is still viewed as an abstraction by many people on Wall Street, and that's just plainly a mistake. I bet these analysts have no idea how much more shopping can be done now that there is spare change in the pockets of people who spend a great deal of their income pumping gasoline. I bet these same analysts would be pushing Ross Stores and TJX if we got a tax cut of similar magnitude.
About these two names specifically? Sure, the stocks are trading above their historical norms, but so are many others. More important, they really haven't done anything this year. Ross is up 8% year to date, and TJX is down 2%. These are hardly the kinds of stocks that have run away to the upside and should be trimmed back. Both companies are excellent retailers with a tremendous amount of runway to them.
All week we have been pleasantly surprised by retail. Consider that both Macy's (M) and Nordstrom (JWN) cut forecasts, but buyers flocked to them anyway, in part because of management commentary and how well they are set up for the holiday season. Macy's took care to mention that the gas-pump price figured importantly in the strong quarter that was just announced. Last night on Mad Money Cheryl Bachelder, the CEO of Popeye's Louisiana Kitchen (PLKI), cited lower gasoline prices as one of the chief reasons the company was able to do 7% comparable-store-sales growth.
I think Wal-Mart (WMT) also got a huge tailwind from the gasoline decline -- and, judging by prices, it is only going to get better. Wal-Mart is a lot better than it used to be because of some important changes to its line-up, including better stocking and more natural and organic food. But, to me, the big positive here is that money that would have been spent at the pump is now being spent at the register.
Look, I totally understand analysts being nervous about the group. Over at Action Alerts PLUS, we took a profit in Macy's for fear the company would cut its forecast -- and that's exactly what it did. But I think the analysts made a judgment that declining gasoline prices were a positive ahead of the holiday season, and decided to stick with it anyway.
I say: Let these stocks run. They were tremendous growth vehicles for years, and then for the longest time only shares of Costco (COST) and Home Depot (HD) seemed to be going higher. Because of gasoline, everyone is now joining the party. There will come a time when retail will be too crowded a trade. But right now it's just beginning, and I think you should stick around for the gains.