The Rise (and Retreat) of Retail Stocks

The Rise (and Retreat) of Retail Stocks

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Hello, Reader.

As you drive through town running errands on the weekends, the signs are everywhere…

  • The Bed Bath & Beyond where your niece registered for her wedding is now a furniture store…
  • You’re tempted to pop into Party City because it has an EVERYTHING MUST GO – 80% OFF sign emblazoning its front…
  • And the shopping mall is a ghost town, save for the kids using the parking lot as a skate park.

You may take it as a sign that the economy is weak… inflation is high… and people just aren’t shopping at bricks-and-mortar stores much. And you’d be partially correct.

But it’s not an overall harbinger of doom for retail stocks. In fact, this is one of the sectors where we’ve spied – and capitalized on – some lucrative opportunities.

From layoffs to store closings, the past few years have proven tumultuous for consumer defensive and consumer discretionary stocks.

But there is plenty of money still to be made…

Here’s what you need to know to make smart investments in retail.

Defensive vs. Discretionary

Regular readers might have picked up on the fact that we are bullish on certain retail stocks of the consumer-defensive and consumer-discretionary variety. First, it’s important to know the difference.

Consumer-defensive stocks are the companies that provide needed goods to households – think food, beverages, and personal products. These are things that we can’t live without, so the companies who manufacture the goods – and the companies that sell them – are known as consumer staples.

These are usually good investments to add to your portfolio, and we’ve spent time discussing them in the past.

Consumer discretionary stocks comprise goods and services bought with expendable, discretionary funds. Think of the Nespresso machine or a fun pair of athletic shoes.

These can be good investments… but in times of economic uncertainty, this is also a sector that can suffer. When people spend the bulk of their earnings on “need to haves,” or defensives, then there’s less money for the “nice to haves,” or discretionary stocks.

Read on for some successful staples – and surprising discretionary stars that’ll get your blood – and portfolio – pumping.

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Why Staples Are Successful

Consumer staples who we consistently see as positive additions to portfolios include Costco Wholesale Corp. (COST), Walmart Inc. (WMT), and Target Corp. (TGT). In fact, we recently closed a TGT trade in our Strategic Trader elite trading research service for a 25.70% annualized gain.

When we look for great consumer-defensive stocks, we look for those with consistently strong organic sales, lots of market share, and attractive dividend yields. These are stable companies that don’t necessarily need to continuously innovate to be profitable. The COVID-19 pandemic proved to be boom times for these companies (remember the toilet paper shortage?), and because households need food, energy, and other must-haves, they continue to thrive.

One hurdle that bricks-and-mortar companies everywhere face is attracting and retaining workers in a tight labor market. Walmart has faced criticism for dispensing low wages in the past but announced last week that it would increase starting wages from $12 to $18 hourly to $14 to $19. It’s a positive sign for the overall economy and signals financial wellness for the retail giant, which also announced a large-scale effort to renovate stores.

As consumers tighten their belts, Walmart sees an opportunity to attract more affluent customers and perhaps persuade existing customers to add a few more little luxuries, like clothing, shoes, and cosmetics, to their grocery basket. To that end, they’re adding more spacious floor plans to highlight those products, along with new displays and a more “Target-like” feel.

We expect innovations like these to add to Walmart’s market share but also feel that it – and other stocks in the sector like it – will thrive, regardless.

Discretionary Darlings and Duds

It’s difficult to choose stocks in this sector in a tight economic market. Consumers are tightening their belts amid inflation rumors and skyrocketing prices in all corners of consumer goods.

Brick-and-mortar retail stores are closing locations across the country left and right. Some notable closings include meme-stock craze star, Bed Bath and Beyond, which is undergoing a debt crisis, defaulting on its credit line with JPMorgan Chase & Co. It closed a few dozen last fall and is on track to close more than 150 stores total.

Mall department stores like Macy’s Inc. (M) and JCPenney have closed stores as well, the latter being part of JCPenney’s bankruptcy proceedings, which were filed in May 2020.

But don’t count out Macy’s yet – just this week, Goldman Sachs analysts called Macy’s one of the “best-positioned retail stocks.”

They said, “We believe M is best-positioned to navigate an uncertain but softer landing economic environment,” due to its ability to manage inventory effectively, improving its private label, earning more tourist dollars in some locations, and rolling out smaller stores.

Retail services stocks aren’t immune from inflation problems, but some companies strategize solutions better than others.

For example, one of our favorites, Starbucks Corp. (SBUX), frequently deals with inflation-deflation cycles in their raw materials (coffee beans). General inflation is more complicated for SBUX to deal with than just rising coffee prices. But the firm is already good at adjusting to maintain price stability. That’s why we expect SBUX to stay off its lows and rally in the short-term.

In fact, we closed a Starbucks trade last week that netted a 228.45% annualized gain! We’ve closed out eight winning trades just one month into 2023… and we’re just getting started.

To learn how to take advantage of these unique opportunities that Wall Street generally glosses over – but have contributed to our stunning 2022 win rate of 94.03% – click here. Our next trade could come as soon as tomorrow…

Make sure you’re ready for it.


John and Wade

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