Fed’s Easy Money Reason for the Rise in Retail Sales?

Easy Money Reason for the RiseThe retail sector is showing decent growth driven by jobs growth and the improvement in the housing market, which is adding some confidence to consumer spending. The number reported last week was excellent, and it bodes well for the retail sector. Retail sales in February grew 1.1%, well above the 0.2% estimate made by Briefing.com. On an ex-auto basis, sales grew at one percent, which blew away the Briefing.com estimate of 0.3%.

Retail sales in February, comprising 22 retailers polled by Thomson Reuters, showed that same-store sales increased a better-than-expected 1.8%, though they were down from the previous months.

The chart of the S&P Retail Index shows the recent breakout and upward drive in relative strength, based on my technical analysis.

XRT SPDR S&P Retail Index stock market chart


Chart courtesy of www.StockCharts.com

The results in the retail sector are decent, especially with some of the department store chains, such as Macys, Inc. (NYSE/M), which is trading at a 52-week high.

Yet where I continue to see the best buying opportunity in the retail sector is in the big-box stores and discount retail chains. The reality is that there are still over 12 million unemployed Americans, and the middle class continues to struggle, so I expect discounters will continue to deliver in the retail sector.

Target Corporation (NYSE/TGT) is intriguing, due to its rollout of stores across Canada, which will compete in a competitive retail landscape with Wal-Mart Stores, Inc. (NYSE/WMT).

In the large-cap retail sector area, the top companies are Wal-Mart, Target, and Costco Wholesale Corporation (NASDAQ/COST).

The king of the big-box stores is Costco, which reported a strong second quarter (ended February 17, 2013). Quarterly sales grew eight percent to $24.3 billion. Earnings were $547 million, or $1.24 a diluted share, up from $394 million, or $0.90 a diluted share.

Costco’s stock chart, featured below, is a wonderful example of consistency and steady price appreciation.

COST Costco Wholesale corp Nasdaq stock chart

Chart courtesy of www.StockCharts.com

The results continue to show steady growth, but for added growth, you should look at the smaller discount companies in the retail sector.

Costco, for instance, has a market cap of $45.0 billion and is estimated by Thomson Financial to report sales growth of seven percent and 8.7% for FY13 and FY14, respectively.

By comparison, take a look at mid-cap PriceSmart, Inc. (NASDAQ/PSMT), an operator of warehouse clubs across 12 countries in Central America and the Caribbean.

Consider the comparative sales growth for PriceSmart by Thomson Financial, which is 13.1% and 15.3% for the FY13 and FY14, respectively—its growth is expected to be higher than Costco’s. The growth estimates are probably conservative, and PriceSmart could really take off if its expansion continues.

PriceSmart’s stock chart below shows a plateau and sideways trading. Be careful of the downside risk.

PSMT PriceSmart, Inc. Nasdaq stock market chart

Chart courtesy of www.StockCharts.com

Another interesting discounter is large-cap Dollar General Corporation (NYSE/DG), which operates over 10,000 stores across 40 states. Dollar General has a reasonable valuation and above-average long-term price appreciation potential for investors looking at the retail sector.

And when the housing market and jobs numbers pick up, I expect spending in the retail sector to continue to increase, especially on non-essential goods and services.

My favorite in the retail sector continues to be the discounters and big-box stores. The big-box stores are now selling a broad range of electronics and are adding to their product lines, offering consumers a one-stop place for shopping and generating higher revenue flow.

For my take on the other end of the retail spectrum, read “Why Michael Kors Outdoes Other Luxury Stocks.”