Portable Alpha Daily

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Friday, August 11, 2006


There’s been a lot of discussion lately about the Retail sector, especially with regard to solid earnings reports from the likes of JC Penney Corp. (JCP), Target Corp. (TGT) and Kohl’s Corp. (KSS). Many analysts and managers list Retail as a sector positioning itself to lead the market in the coming weeks. I’m not sure if I fully support that projection yet, but I will admit that I’m seeing a strengthening of the sector. And although Retail as a whole, which we analyze using RTH, remains a “neutral” rated sector, there are over twenty retail stocks this morning listed as “buy” recommended, and over fifty that are “neutral” rated. Of course there are almost seventy that are “sell” rated, so treacherous water remains.

So is retail an area where investors looking for alpha should allocate into? With school starting up and the Holidays in the not-too-distant future, investing in retail may seem like a no-brainer. My concern now is the slowing economy, consumer confidence, and inflation worries, which we’ve all heard plenty about over the last few weeks. These nasty ingredients should prevent investors from taking a carte blanch approach to the retail sector, if they ever did. The solution, in my mind, is to set up a retail stock watch list, and see how they perform over the next week or so. If it appears that consumer spending remains relatively robust and the foundation for a late-year rally solidifies, investing in retail might be a pretty good idea.

Personally, I’m inclined to divide the next four and a half months into two separate time frames with regard to retail: Back to School and Holiday. Today’s post will only include back-to-school retail stocks. Investors wanting to generate alpha via a short-term retail stock investment should be looking at companies like American Eagle Outfitters Inc. (AEOS), JC Penney Corp. (JCP) and Dillard’s Inc. (DDS). These are the only “back-to-school” retail stocks that are “buy” rated as of today, but ones that will likely improve if retail as a whole continues to strengthen.

Several others back-to-school companies are “neutral” rated though, but they should certainly be on the watch list. These include: Abercrombie & Fitch (ANF), Gap Inc. (GPS), Nordstrom Inc. (JWN), Kohl’s Corp. (KSS), Target Corp. (TGT), and Wal-Mart Stores Inc. (WMT). If you currently own these stocks, hold onto them unless they trigger whatever sell rules you’ve established. If you don’t own them yet, but are looking to invest in retail soon, I’d wait for the trend to solidify further.

Of course, the Retail sector is providing buying opportunities outside of the back-to-school market for those interested. Currently, our top three rated Retail stocks overall are Gamestop Corp. (GME-B), Sotheby’s Holdings Inc. (BID) and Rent-A-Center Inc. (RCII).

The bottom line is that retail should be on your radar if it isn’t already. However, it’s far from the strongest sector at the moment and the risks, I’m afraid, still out-weigh the potential rewards. Pay special attention to it over the next few weeks, and if it continues to strengthen, I think it’s a good sector to allocate a small portion of your portfolio into. Have a great weekend and be sure to check out the AAS Top Ten post on Sunday!


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