The latest Gross Domestic Product (GDP) figures are out, and it appears that the U.S. economy grew slightly as consumer spending accelerated in the fourth quarter. This was a pleasant surprise for some, but the good news was somewhat weighed down by two selloffs in the retail sector.
Retail Red Flags
Shares of JC Penney (NYSE:JCP) fell over 15% Thursday after the retailer reported a net loss of $552 million for the fourth quarter. Excluding items, the loss was $1.95 per share. Analysts forecast a loss of just 18 cents per share, so JCP vastly underperformed expectations. The culprit was that holiday sales came in below expectations—net sales slid to $3.884 billion compared with the $4.08 billion consensus estimate. This prompted a series of negative reports on JCP, and the analyst community slashed its consensus estimate for next quarter: Now, J.C. Penney is headed towards a 32% drop in earnings.
Competitor Sears (NASDAQ:SHLD) also sold off Thursday following its fourth-quarter earnings announcement. While the company narrowed its net loss to $489 million, and beat sales and earnings estimates, same-store sales at home and abroad fell. Kmart is struggling in terms of consumer electronics sales, so that division posted a 3.7% drop in same-store sales. Sears has fallen behind the competition thanks to a lack of innovation and the fact that its customer base was hit harder than usual by the slow economic recovery. So with such a lackluster earnings announcement, investors are still leery of SHLD.
Looking ahead, economists are uncertain whether consumer spending will continue to drive the economic recovery. After all, consumers are now contending with higher gas prices and higher taxes than last year.
Retail Green Lights
However, there will always be a handful of retailers that will continue to draw in customers no matter what the overall economy is doing. So instead of eschewing retail stocks altogether, limit your new buys to only those stocks that are A- or B-rated in my Portfolio Grader tool. Here’s a sample of some of the best opportunities in retail right now based on closing prices from Thursday:
In the long run, sticking with only the best of the best will grow your portfolio.