Cashing in on the Retail Sector

The retail environment looks better than expected as we head into the key shopping period of the year after Thanksgiving. Wal-Mart Stores, Inc. (NYSE/WMT) announced positive retail numbers and this was followed on Friday by news that fast-food king McDonald’s Corporation (NYSE/MCD) said its third quarter earnings would surpass Wall Street, with the key same-store sales number up a healthy 6.9%.

 We also saw strong retail sales numbers for September, with the core retail sales excluding auto rising a stronger-than-expected 0.4% in September versus an estimated 0.3% increase. This was an improvement over a 0.4% decline in August. The headline number increased 0.6% in September, above the 0.2% estimate and well above the 0.3% gain in August.

 The recent decision of the Federal Reserve to lower the Fed Funds rate may be helping to drive some consumer spending, although sales results are mixed among some retailers. There is still some concern with the high gas prices, which impact shopping and higher financing rates for big-ticket items. The paying off of credit debt is also cutting into the consumer’s disposable income and what they have to spend. A good majority of people have fixed budgets. Of course, as retail sales account for about two-thirds of GDP, it is critical.

 If you hold retail stocks, here is what you may want to consider. If you are long-term, you should stick with the large retail companies. Warren Buffett owns both The Home Depot, Inc. (NYSE/HD) and The Gap, Inc. (NYSE/GPS).

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 If you are negative on the retail sector and want to short, I would suggest you reconsider unless you have a stomach for risk. If you need to short, please place appropriate stop-buys on the short position or you could find yourself sucking air should the stock stage a strong rally. A better alternative to shorting would be to buy Put options or initiate Bearish Put Spreads.