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How to Shop in the Topsy-Turvy Retail Sector

The group keeps sending mixed messages. Don't get confused


Nothing drives the market crazier than mixed messages, so pity the poor retail investor. It seems every day brings a bit of news that colors the sector’s outlook another shade of grey.

The latest bit of middling data came Thursday, when the Commerce Department said December retail sales rose just 0.1%. That fell well short of Wall Street’s average forecast for a 0.3% gain.  More troubling, excluding motor vehicle sales, retail sales dropped 0.2% vs. expectations of a 0.3% rise. So-called core sales — which strip out autos, gas and building materials — fell 0.2%. That’s their first decline since 2010.

And yet, at the same time, it turns out November retail sales were much stronger than initially estimated, growing a healthy 0.4% rather than the scant 0.2% initial estimate. October sales were revised slightly higher, too.

It’s enough to drive retail investors batty. Just a week ago, the nation’s stores reported mixed December sales results. Department-store giant Macy’s (NYSE:M), which should have suffered as much as any other retailer from a highly promotional, margin-squeezing selling season, had a blowout month. It also doubled its dividend. Luxury retailer Nordstrom (NYSE:JWN), likewise did well.

But a slew of high-profile names, including discount giant Target (NYSE:TGT), midprice-chains Kohl’s (NYSE:KSS) and J.C. Penney (NYSE:JCP), and specialty retailers American Eagle Outfitters (NYSE:AEO) and Children’s Place (NASDAQ:PLCE), all offered up disappointing results and outlooks.

More recently, Tiffany (NYSE:TIF) further clouded the picture with a shocking report Tuesday, in which the bellwether luxury retailer slashed its forecast.

For retail investors, it must feel like there’s no place to hide, notes Brian Sozzi, an independent analyst and chief business development officer at NBG Productions. “After last week’s wallop to retail stocks on holiday sales reports and earnings warnings, investors are discovering the outbreak of badness spread to the high-end,” Sozzi says in emailed commentary.

And, as if there weren’t enough moving parts among retail stocks, Target aimed to shore up its share price Thursday by approving a $5 billion buyback program.

Still, before retail investors do anything rash, they would do well to remember that the sector has held up fairly well in face of all the mixed data and news.

The SPDR S&P Retail ETF (NYSEARCA:XRT) is up 9% since Black Friday, lagging the broader market by a bit more than 2 percentage points. For the year-to-date, the retail index is essentially flat, also trailing the S&P 500 by a bit more than 2 points.

True, retail shares are lagging, but they’re hardly getting hammered. And although the flow of news and data has made retail something of a stockpicker’s nightmare, it could be an indexer’s delight.

Retail is an early-cycle sector, meaning it rises ahead of a broader uptick in the economy and market. If you’re bullish on the American consumer and equities over the next 12 to 18 months, bets on the sector through the SPDR S&P Retail ETF or the PowerShares Dynamic Retail Portfolio ETF (NYSEARCA:PMR) are likely the best way to go.

It’s been a surprisingly rewarding play over the past year, anyway. The SPDR S&P Retail ETF is up 12% over the last 52 weeks, while the broader market has done nothing. Buying on weakness could be the best way to capture any gains from a sector that’s currently a crazy quilt of uncertainty.

Article printed from InvestorPlace Media,

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