Retail Stocks: Why I’m So Picky About Them

George is extremely picky when looking at the retail sector. In fact, the majority of investment newsletters suggest avoiding retail stocks. And while he's not totally in agreement with that view, he would be more selective with stock picking in the retail sector. I’m extremely picky when looking at the retail sector. In fact, the majority of investment newsletters suggest avoiding retail stocks. And while I’m not totally in agreement with that view, I would be more selective with stock picking in the retail sector.

The stats don’t lie. Retail sales in the U.S. are estimated to come in at $389.65 billion in March, compared to $344.24 billion in January, according to The Financial Forecast Center. But here is the problem: retail sales are predicted to slide to $343.09 billion by September 2011.

These are not necessarily readings you can get excited about. There continue to be mixed readings. Retail sales excluding autos grew at 0.7% in February, just above the 0.6% estimate. This is encouraging, but, in my view, the key is to look for same-store sales growth in retailers that sell non-essential goods or what are known as durable goods. Increases here show that consumers are spending on goods and services that are non-essential. These include electronics, appliances, furniture, autos, and other big-ticket items.

The uncertainty was clearly reflected in the recent weak Durable Goods reading, which was a disappointment and in my view worrisome. Non-discretionary spending remains a problem. Durable Goods orders were disappointing, with a decline of 0.9% in February, lower than the expected increase of 1.1%. Excluding the transportation element, the negative 0.6% reading was well below the 1.8% increase that was estimated.

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In my view, the readings clearly indicate the continued reluctance by consumers to spend on non-essential big-ticket items, and this is bearish

Electronics retailer Best Buy Co. Inc. (NYSE/BBY, $29.55) plummeted over five percent last Friday after delivering weak results. The company blamed lower demand for flat-screen televisions.

Overall, I’m disappointed with the Durable Goods results, which in my view continue to indicate weak demand for non-essential goods and services. Again, until we see sustained improvement in jobs and housing, there will likely continue to be problems arising,

Consider that a key driver of the housing market is jobs. We need jobs and security in order to give buyers confidence to assume a mortgage and not worry about losing their jobs and missing payments. We are seeing some improvements in the jobs area, but unemployment remains high at 8.9%. Until we see greater improvement, I question how confident homebuyers will be.

At the end of the day, we need to see the willingness to spend and not worry about money. Only under this scenario will there be sustained spending.

Given the current problems, consumer spending will likely to continue to be soft, which will impact the growth of gross domestic product.

If you are buying retail, stick with the discounters, dollar stores, and big-box operations.