The retail sector (XRT) is getting battered on Tuesday. That might be good news for stock pickers.
The current market and fears over yet more corrections to come alongside continued Fed tightening is helping take the sector down, even as the biggest season for sales hits its peak this week. Names like Kohl's (KSS) , Target (TGT) , and TJ Maxx (TJX) are all sagging as 2018's gains are wiped away.
However, as a popular Game of Thrones character once said, chaos is a ladder.
Stock Picking is Back in Style
Market watchers have first noted that the long bull run of the market may be meeting its end, opening up room for stockpicking.
"It didn't pay to be a stock picker over the course of this long, protracted cycle," Amanda Agati, co-chief investment strategist at PNC Financial Services Group, told Real Money. "That seems to have changed in the past month."
She noted that active managers and stock pickers should finally find room to outpace indices that have been bursting higher for years, especially as sectors no longer seem to be moving in lock step.
The delineation between "haves" and "have nots" in retail will become the battleground wherein active managers separate themselves.
Agati noted that many high-flying growth stocks are likely to fall back to earth.
"Value will reassert itself," Agati explained. "As the Fed continues to tighten we think you should avoid highly levered companies and instead look at the high cash-flow businesses."
As such, debt-laden companies like JCPenney (JCP) and the now bankrupt Sears (SHLD) would be poster children for over-levered companies. Meanwhile, a company like Target maintains a quite low debt-to-equity ratio.
"We also like discount store," Agati added. "Yes we are setting up for a strong holiday season that could see a lot of upside surprises, but we are also getting close to an inflection point [in 2019]."
Low cost retailers therefore could be meaningful plays in 2019, while higher price point retailers like Nordstrom (JWN) might be in for more issues.
Data Set So Far
In the nearer term, there is good grounding for the upside surprises that Agati anticipates.
Michele Dupré, Group Vice President of Retail, Hospitality & Distribution at Verizon Enterprise Solutions, told Real Money that e-commerce data collected for the season so far is promising.
According to Verizon's data, there was a nearly 15% increase year over year in e-commerce traffic for the Sunday before Black Friday, indicating that higher wages and job numbers have indeed helped bolster discretionary spending.
"A strong trend in consumer confidence is highlighted by shopper's interest in the early Black Friday deals that we started learning about in early November," she explained.
The strong numbers have carried through to the holidays in recent years, but Dupre was quick to not assume the same conclusion.
"The challenge will be to see if this trend can be maintained throughout the season," she hedged. "It is too early to say whether it will help or diminish results."
Dupre declined to speculate on Friday's sales, but did note that e-commerce should be a boom sector for years to come for longer term investors.
"E-commerce will become the dominant trend for retailers, whether that is driving traffic to stores, store pickup, or delivery," she said.
Active traders will be keying in on sales figures on Friday for certain. For the time being, shrewd selectors could be shopping for stocks set to succeed.