Don't Be Fooled by the Retail Numbers—Just Be Selective

By George Leong  for Investment Contrarians

When interest rates are as low as they are and consumers begin to hold back on their spending, you have to wonder about the prospects for the retail sector going forward.

With the higher taxes on those earning over $400,000 and other tax increases as a result of the sequestration, we may be seeing some evidence of reduced spending.

The U.S. Department of Commerce said retail sales in March contracted by 0.4% on both a headline and an ex-auto basis, which was below the Briefing.com estimates of flat sales and 0.3%, respectively. This was the second decline in retail sales in the last three months.

While it may be premature to assume a new downtrend for retail sales, I wonder if the decline in take-home pay for some Americans has resulted in less consumer spending.

Or, it may be the softness of the jobs market that is making consumers nervous. With only 88,000 new jobs created in March, the jobs numbers must have had some impact on consumers and the retail sector.

Even consumer sentiment appears to be fading a bit as evidenced by the Thomson Reuters/University of Michigan Consumer Sentiment Index reading of 72.3 in April. This reading represented the worst reading since July 2012, and it’s well below the 76.0 estimate by Briefing.com and the 78.6 reading in February.

According to my estimate, the retail sector continues to be full of opportunities, but you also need to be careful on what retail stocks you buy.

You would have been sideswiped if you bought J. C. Penney Company, Inc. JCP, as the company posted horrible results and subsequently fired its CEO. Rival Macy’s M or Nordstrom, Inc. JWN would have been better choices.

The chart below of the SPDR S&P Retail index shows its recent breakout on the chart on an ascending triangle, coupled with rising relative strength.

In spite of the March readings, it’s way too early to make a judgment about the prospects of the retail sector. Three months doesn’t form a trend, and the retail sector isn’t coming to halt.

I favor both discount stocks and big-box stores, while I also like Michael Kors Holdings Limited KORS in the luxury space. A contrarian situation in the luxury retail sector is Coach COH, which is struggling just above its 52-week low.

As we move forward, I continue to believe there are excellent opportunities in the retail sector, but you need to be careful when selecting the stock.

This Article Don’t Be Fooled by the Retail Numbers—Just Be Selective was originally published at Investment Contrarians