The S&P Retail ETF is up around 35% year to date, compared to an approximate 20% rise in the S&P 500. The Retail index has been the best performing index based on the strength of the sector as a whole, as well as positive growth and projections from the individual companies.
Why the strength?
The retail sector is very unique as its success or failure is based on macro and microeconomics data, and other external factors. The data that best supports the retail industry include a lower household debt ratio, an increase in household net worth, a stable gas price, and a lower unemployment rate (compared to peak figures).
So who to buy?
Investors are left with many options when it comes to the retail sector, or alternatively, an investor can buy the ETF outright and have a diversified exposure to 98 retailers.
A true winner in retail
Costco Wholesale Corporation (NASDAQ:COST) should be a top pick for any portfolio looking for exposure to retailers. To start off, the company has a long term target of 1,200 clubs with a greater mix of international sales. In the company’s most recent earnings (3Q13), international comparable store sales were up a healthy 4% from previous quarter. The company has tons of cash, around $12 per share at the end of 3Q13, which gives it a cushion. In addition, same stores sales momentum remains healthy and its 5%-6% core appears to be sustainable.
Costco Wholesale Corporation (NASDAQ:COST) is one of the few if not the only large cap growth companies left in retailing and as long as traffic remains stable, Costco’s share price should continue trading at the higher end of the historical range. The company’s growth will continue to be driven by strength in small electronics, housewares, jewelry, and apparel. Hardlines and fresh foods comps increased in recent quarter and will also continue driving growth moving forward. Costco Wholesale Corporation (NASDAQ:COST) is also well positioned to continue capturing market share in the ever important online shopping market, as sales grew over 20% year over year in the U.S. and Canada.
Firing on all cylinders
Macy’s has been firing on all cylinders. The company sees same store sales at 3%-5% in 2013-2015. The popular retailer has a big opportunity to optimize inventory; turns at 3.1x are too low. From a financial point of view, a healthy free cash flow and leverage opportunities create impressive buyback power. Finally, a diversified product mix as well as demographic niche creates a competitive advantage that very few other retailers can claim.
Macy’s (NYSE:M) is a great stock to play a complete economic recovery which has not been seen yet. The company is committed to provide shareholders with value by recently increasing the quarterly dividend and announcing a $1.5 billion increase to its share buyback program. Looking forward, the company affirmed its outlook for same store sales growth of 3.5% and earnings of $3.90-$3.95, while the analyst consensus is in the mid range, at $3.92. The second-largest retailer is in a “sweet spot” for growth, and will make a nice addition to any portfolio.
Dollar stores are a small piece of the pie, but shouldn’t be ignored.
The dollar stores represent a small piece of the pie when compared to the “big boys” but this doesn’t mean investors should turn their backs and ignore the potential. Dollar General Corp. (NYSE:DG) recently reported somewhat disappointing first-quarter results, and the pullback made the shares “cheap,” opening an attractive entry point for investors with a longer-term frame of mind.
The company’s report wasn’t all negative as Dollar General Corp. (NYSE:DG) opened 165 new stores and relocated another 207. Analysts at Bernstein believe that sales can rise by mid-single digit percentage levels over the long-term, and profit margins still have room to grow as well. Also important to note is the company’s commitment to grow shareholder value through potential future share repurchases and dividends.
Another attractive alternative in the dollar store category can be Dollar Tree, Inc. (NASDAQ:DLTR), which has a healthy balance sheet and comp outlook looks better when compared to Dollar General, especially in the second half of 2013. The company still has plenty of room to grow both domestically and internationally.
Conclusion
As long as the economic factors remain favorable, retailers are poised to do well in the second half of 2013 and beyond. Costco remains a top pick, however, any of the companies I have mentioned remain a solid investment. Whenever I go shopping at a retailer whose stock I follow, I always make it a habit to ask someone if they have noticed an increase in foot traffic over the past weeks, months, or years. I encourage you to do the same as there is no better indicator of growth than by asking someone who has seen it first hand.
Jayson Derrick has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale.
The article Now Is a Good Time to Buy Retail Stocks originally appeared on Fool.com.
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