For months, investors have been preparing for an all-out meltdown in the markets as the problems in Europe have grown. While there haven’t been any all-clear signals from the continent, investors are starting to figure out that the market may be able to march higher despite the ongoing concerns. As a result, stocks started February where they left off in January.
Our research shows that the retail sector tends to outperform the market more than twofold when a recovery is under way. That makes sense as improvements in the economy result in better consumer sentiment, which results in more spending, which ultimately drives the retail sector higher.
Looking at the last five years of returns, the SPDR S&P Retail ETF (NYSE:XRT) has had a tendency to outperform the SPDR S&P 500 ETF (NYSE:SPY) in February. For the month, XRT posted positive returns four out of five years, while the SPY was only able to move higher in two of the past five years. The table below displays the returns for the past five years for both ETFs.
|Year||SPDR S&P 500 ETF (% CHANGE)||SPDR S&P Retail ETF (% CHANGE)|
We’re expecting the retail sector to hammer the rest of the market this February since the group has a great advantage over other sectors: As of the close of January, the XRT has the highest percentage of companies breaking through to new 12-month highs. As we know, new highs always attract investors, making the retail sector and XRT shares a target for outperformance this month.
Here are the details: As of January’s close, 21% of the companies that make up the XRT were breaking through to new 12-month highs. To put that into perspective, only 9% of S&P 500 companies and just 14% of the recently hot Nasdaq 100 companies can say the same. We like the odds that the market will flock to these breakout stocks, so which ones appear ready to roll even higher in February?
Advance Auto Parts (NYSE:AAP): Auto-parts companies such as Advance, Autozone (NYSE:AZO) and O’Reilly Automotive (NASDAQ:ORLY) have been on a tear as the do-it-yourselfers roll up their sleeves to work on their cars. We like all of these companies to outperform the market in February despite the high short interest and low analyst ranks on AAP. (Only 22% of the analysts covering the stock have it ranked a buy.) If that wasn’t enough, short sellers have been piling on their bearish positions. With a short-interest ratio of nearly 8, the stock is ripe for a short covering rally. This stock has more upside potential since the AAP bears will start to capitulate and turn into buyers.
Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR). Discounters such as Dollar General and Dollar Tree continue to attract shoppers to their stores as consumers look to stock their shelves for less. While the economy might be performing better, we don’t expect shoppers to abandon their frugal ways, which means these stores will stay busy. Lately, the shorts have been increasing their positions here, calling a top for these stocks. History tells us that this means there’s more room for these stocks to run higher.
Ross Stores (NASDAQ:ROST). Following the discount theme is Ross Stores — the chain sells discounted apparel, accessories, footwear and home fashions. The company is expected to announce earnings growth of more than 20% (year-over-year) in March, which should get the analyst community’s attention. Right now, only 42% of the analysts covering the stock have ranked it a “buy.” The Street loves to recommend stocks that are making new highs.
Wal-Mart Stores (NYSE:WMT). Wal-Mart recently got some of its swagger back — the retail giant is starting to outperform the market again. For years, WMT was the poster child for “overloved stocks” as over 90% of the analyst community continued to rank it a “buy” as it underperformed. Now, WMT is breaking through to a new 12-month high — and only 46% of analysts rank the stock a “buy.” The crowd will start upgrading the stock soon as it continues its move higher, driving even more buying power toward the shares. In other words, it’s still early for WMT.