What You Need to Know
About Retail Stocks Now

The latest on what's going on in the retail sector and with retail stocks.I’m extremely picky when it comes to the retail sector. In fact, numerous 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 0.8% in March, just above the 0.7% estimate. It was the second straight month of outperformance.

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 mean that consumers are spending on goods and services that are non-essential. These include electronics, appliances, furniture, autos, and other big-ticket items.

The Durable Goods Orders reading for March was encouraging, with a better-than-expected 2.5% increase versus the 1.8% estimate and up from a revised 0.7% in February. Excluding the transportation element, the reading of 1.3% was also better than expected.

While the numbers were not exceptional, there appears to be progress. Jobs are being created and the unemployment rate is falling. Consumers appear to be spending on non-essential big-ticket items and this is bullish. Again, until we see sustained improvement in jobs and housing, there will likely continue to be problems arising,

A strong housing market is important, as homeowners buy new furnishings, including many big-ticket items. There are some positive signs. The key Housing Starts for March were stronger than expected for the third time during the last four months. The March reading came in at an annualized 549,000, well above the estimate of 520,000 and the revised 512,000 in February. And, as far as the homebuilders go, Building Permits for March were strong at 594,000, above the estimate of 540,000 and the revised 534,000 in February.

The readings over the past four months are encouraging and we need to see this continue. The major hurdles are the continued high foreclosures and short sales in housing, along with declining home prices, so there are still reasons to be concerned.

Also 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 jobs and missing payments. We are seeing some improvements in the jobs area.

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.

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