How to Be Successful in Retail Investing

How to Be Successful in Retail InvestingBuying in the retail sector continues to be selective. Consumer spending continues to be trepid as evidenced by the retail sales reading in May that pointed to a 0.2% decline in total spending, which was in line with estimates and the April reading. Excluding automotives, the reading fell 0.4%, which was off the mark and was a 0.3% decline in March.

While the readings in the retail sector don’t blow me away, I’m encouraged by the ability of consumers to want to spend despite the continued lack of strong jobs growth. We are seeing some jobs growth and a lower unemployment rate, which should help to drive consumer confidence and the desire to spend in the retail sector. This is critical as every dollar spent creates jobs and additional spending down the road.

Think about it this way. You go to a restaurant and have dinner. The restaurant attracts consumers so it can remain in business and hire workers. The waiter you tip then has extra income to spend on goods and services. The waiter then goes and buys a shirt at the department store. The sales clerk ringing in the sale earns a wage and possible commission on the shirt. In turn, he or she goes out and spends, and so on; hence the importance of the multiplier effect in the retail sector. Some economists estimate that each dollar initially spent can generate up to $7.00 in consumer spending in the retail sector, which is why its critical consumers spend to get the economy going.

I cannot say I’m a big supporter of the retail sector, but the conditions have improved and will likely get better. The key is buying the retail stocks that show growth despite flat economic renewal, whether they are big box stores, discounters, or luxury retailers.

Luxury retailers continue to fare well, but even these companies are facing some spending hurdles. Michael Kors Holdings Limited (NYSE/KORS), Tiffany & Co. (NYSE/TIF), and Coach, Inc. (NYSE/COH) are high-end brands that are well below their 52-week highs and perhaps ripe for some oversold buying at sale prices. The question, of course, is if the sale is over or will we see yet a bigger discount? This is a risk you have to take.

On the other end of the spectrum, discount stores such as Dollar General Corporation (NYSE/DG), Dollar Tree, Inc. (NASDAQ/DLTR), Family Dollar Stores, Inc. (NYSE/FDO), and Wal-Mart Stores, Inc. (NYSE/WMT) are outperforming in the retail sector. But if you want the smaller variety, PriceSmart, Inc. (NASDAQ/PSMT) is worth a look.

In the growing global jeans market that includes China and India, American Eagle Outfitters, Inc. (NYSE/AEO) and The Gap, Inc. (NYSE/GPS) are near their 52-week highs. An up-and-coming maker of jeans in both the low- and high-end space that is interesting is True Religion Apparel, Inc. (NASDAQ/TRLG). The stock traded at a 52-weeek high of $37.82 prior to getting slammed by investors on February 10 when the company reported a shortfall in its fourth quarter earnings, which in my view is not a major concern, as long as a pattern doesn’t emerge.

The key to investing in the retail sector is to search for companies that offer products to some sort of niche market or that offer a product that differentiates it from its competitors. I also like to look at retailers that may be currently in the dumps with investors but that have strong brand awareness.

China’s travel market is also a place you need to have some capital. (See “Why China Is Hot for Travel Stocks.”)