Retail stocks are in a tenuous position. They thrived to begin 2018, and for three quarters rolled to solid gains. Then in the fourth quarter they got rocked despite the fact that they had been gaining momentum from healthier consumer spending and a stronger than expected holiday shopping season. So what to do? Jefferies says it is time to buy the dip, based on the fact that “The consumer is strong, Amazon isn’t killing retail, the Federal Reserve is more dovish, oil down, first-half weather compares easy, free cash flow piling up, margins are moving up and consumer discretionary stocks are cheap on absolute and relative basis”. Check out these names: Gap, American Eagle Outfitters, Five Below, Foot Locker, Kohl’s, Urban Outfitters, Under Armour, Tapestry, and Lululemon Athletica.
FINSUM: Our view is that at some point soon (has it already happened?), ecommerce and brick and mortar are going to fall into equilibrium. When that happens, it will be good for traditional retailing stocks.
The market is not doing well this month. That is probably a serious understatement, in fact. Yet, that leaves room for opportunity, both in aggregate, but also in specific shares that might lead in these tougher times. Retail is an interesting choice right now, as the economy is still doing well and we are headed into the busy holiday shopping period. With that in mind, take a look at Gap, Foot Locker, and Michael Kors Holdings, all of which look cheap “relative to their respective sectors” and have “identifiable catalysts between now and year-end”, according to analysts at Jefferies.
FINSUM: Retail is interesting to us at present because it is not overly rate sensitive and is heading into its strongest period of the year right when the economy is looking best. That said, we are worried about consumer spending falling on the back of these equity losses.