Life is short! Buy the shoes! Or maybe the stocks of those shoe companies. Retailers have gotten slammed by the recession, as unemployment soars and consumer spending has fallen off a cliff. But don't strap on your cliff-diving shoes from Under Armour (NYSE: UA) just yet.
Why begin looking at retailers now? In order to weather the downturn, retailers have positioned themselves as lean, mean, fighting machines. They have slimmed down inventories and cut costs so much that any slight uptick in demand from consumers will cause many to beef up just-in-time inventories, translating directly to sales. All they need is an uptick in demand -- and that may be coming sooner than widely thought.
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The latest consumer confidence reading roared to 54.9, from 40.8 -- blowing away economists' expectations for a rise to 42.3. Surprisingly, consumers might be cozying back up to the idea of spending again, despite the glut of gloom and doom that hangs over them. That's substantive news, since personal consumption comprises about two-thirds of U.S. GDP and has been a driver of economic growth.
In addition, the economy is showing signs of improvement. Retail stocks are cyclical, meaning they move up and down in tandem with the overall business climate. However, stocks are forward-looking indicators, thus they should begin to rally before we're officially out of the recession. That means that consumer cyclicals -- including retailers -- will begin to rally ahead of the pack. In fact, in an early bull market, consumer discretionary stocks usually lead the way to outperformance.
Being fashionably late to the stock market isn't like being fashionably late to a party. On Wall Street, if you're late, you miss out on the gains. As we hopefully approach the end of this bear market and transition to a new bull run, you should be ready to pounce on strong, cyclical names. To get you started on your research, I ran a couple of stock screens using the Motley Fool's CAPS screening tool.
First, I looked for retail companies with market caps of $200 million or greater and CAPS ratings of three to five stars. You can view my screen here. Next, I searched for companies within the consumer non-durables industry with CAPS ratings of four or five stars. You may view that screen here.
Combining results from both screens, I extracted the following retailers for further examination:
|
Company
|
CAPS Rating (out of 5)
|
Market Cap (in millions)
|
|
Iconix Brand Group (Nasdaq: ICON)
|
****
|
$910
|
|
Nike (NYSE: NKE)
|
****
|
$26,353
|
|
American Eagle Outfitters (NYSE: AEO)
|
***
|
$2,959
|
|
Guess? (NYSE: GES)
|
***
|
$2,286
|
|
Limited Brands (NYSE: LTD)
|
***
|
$4,054
|
|
Target (NYSE: TGT)
|
***
|
$29,779
|
Data from Motley Fool CAPS as of May 28, 2009.
Among these candidates, I particularly like American Eagle and Limited. The managements of both firms have reported seeing signs of stabilization in their businesses. For its part, Iconix raised its full-year earnings guidance as much as 12.5% -- in sharp contrast to many retailers that are poised to clock negative results this year. Meanwhile, Nike has a strong balance sheet and is still one of the best brands out there, and it should deliver results when the global economy picks back up.
This screen will get you jump-started, but it should be only the first step in your investment research. As always, remain mindful of a stock's valuation, fundamentals, and growth prospects.
Start shopping for your portfolio at Motley Fool CAPS today! Let the collective wisdom of our 130,000 member-strong investment community help you make better investing decisions.
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