Daily Gains Letter

My Investing “Shopping List” for a Tough Retail Environment

By for Daily Gains Letter |

The Diamonds Dogs Current Retail SectorThe retail sector is clearly undergoing some duress early on in 2014 as there is a worrisome feeling that the country’s economic growth may be stalling.

The first quarter’s gross domestic product (GDP) growth was muted. Retail sales were also soft in April. The core reading showed spending contracted by 0.1% in April after 1.3% growth in March. Of course, economists are not concerned, suggesting the first-quarter retail sales will rise.

The winter weather may have wreaked havoc with consumer spending in the retail sector, but it’s now show time; the retailers need to begin to deliver as the weather warms up.

My top rates in the retail sector continue to be the discounters and, oddly enough, the high-end luxury-brand stocks, given the amount of wealth created among the top one percent.

In the luxury area, vying for the “Best in Breed” are Michael Kors Holdings Limited (NYSE/KORS) and Tiffany & Co. (NYSE/TIF). I also like Coach, Inc. (NYSE/COH) as a contrarian pick in the retail sector.

In the discount segment, Costco Wholesale Corporation (NASDAQ/COST) is one of the top stocks. I also like discount stocks Family Dollar Stores, Inc. (NYSE/FDO) and Dollar General Corporation (NYSE/DG). The discount area has also been impacted by the weather, but it remains a top area in the retail sector.

If you are looking at the department stores, the top stock is Macy’s, Inc. (NYSE/M), which is probably the best-managed and top-performing company among the department stores in the retail sector.

Macy’s just reported a first quarter in which it beat on earnings per share but fell short on sales. The results show the apprehension to spend at this time.

A plus is Macy’s announcement that it would buy back up to another $1.5 billion in common stock, increasing its buyback to $2.5 billion. This will help add some support to Macy’s, while reducing the number of shares used in the per-share calculation.

A dog in the retail sector that I continue to dislike is department store J. C. Penney Company, Inc. (NYSE/JCP), which is no Macy’s. J. C. Penney is an inferior investment that I wouldn’t be touching. The company brand may be iconic in America, but that’s about it.

J. C. Penney has a massive $4.08 billion in net debt, which is much larger than its prevailing market cap of $2.7 billion.

It’s a tale of two different stocks; while Macy’s looks to accelerate its sales, J. C. Penney is simply trying to keep afloat and avoid a potential bankruptcy, which could still happen if things don’t turn around soon.

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