The turkey was delicious, the family togetherness was wonderful and the football always entertaining. But that was Thursday, and today we need to start thinking about shopping! Black Friday has already begun as the early openers kicked off the Christmas shopping season, but the real action began this morning.
All eyes will be on the consumer and whether he/she will open the wallet wide this Christmas -- or run up the credit card for a change -- but I am looking at a hedged way to play retail. I am ambivalent about the consumer's propensity to spend this year. Even though the market is up, the rest of the economy is blasé. I sense consumers may just hold spending flat with last year. A few categories here and there could outperform, but they will be the exception rather than the rule.
My Christmas retail strategy is consistent with my usual stock picking method. I am looking for names with robust estimate revisions and reasonable -- not necessarily cheap -- valuations. The names with earnings momentum in retail, which you can see in the table below, suggest my hedged strategy.The interesting twist to the list is that there is little "traditional" consumer retail gaining any traction. The list suggests a bifurcated economy: Tiffany (TIF) at the high end should do well as the top 1% spends a bit of their stock market gains. TJX Companies (TJX) at the low end should do well as the economically stagnant masses pinch pennies and shop for their bargains. And the turn at Best Buy (BBY) is well-documented, with good prospects as electronics still represent good value for the money, and GameStop is similarly situated.
The rest of list diversifies you away from pure Christmas exposure. I have been on Rite-Aid (RAD) for some time as a good turn around -- the front-of-store will still be hostage to the Christmas season, but the pharma side is driving results there. Strength in home renovation is driving strong results at Home Depot (HD), which should have some legs into 2014. Tractor Supply (TSCO) is levered to the strong rural/farm economy, although the nose-bleed multiple makes me nervous.
This list represents a set of retail stocking stuffers that can offer you the exposure you crave, without the risk of betting it all on the consumer. That's a worthy position as you start your own holiday shopping this weekend.