Playing The Retail Sector As Retail Stocks Enjoy A Rally
Money Morning Staff: When screening for good stocks to buy now, you may have noticed this year’s continued climb for retailers.
The SPDR S&P Retail ETF (NYSEARCA:XRT), a collection of nearly 100 stocks, ranging from apparel retailers to specialty stores to Internet retailers, has surged nearly 13% year-to-date. The more concentrated Market Vectors Retail ETF (NYSEARCA:RTH) is up 9.6%.
Even some of the retail sector’s dogs have gotten in on the act. Best Buy Co. Inc. (NYSE:BBY), a stock that was cut in half in the second half of 2012, has nearly doubled this year. After being dead money for several years, The Gap Inc. (NYSE:GPS) started breaking out in 2012 and has kept the good times going this year with a gain of nearly 13%.
Statistics like that might imply that investors who have been slow to embrace retail stocks may have already missed out on the easy money. That risk always exists following voracious broader market rallies, such as the one investors have been treated to over the past few months.
The good news is there are a few retailers that have more upside potential in store for the rest of 2013.
Stocks to Buy Now: A Smaller, Stronger Best Buy?
Our first retail stock has become a possible takeover target.
Having a strong chance of being taken over can really boost a share price. In fact, a large part of the reason Best Buy’s shares have spiked in recent months is the expectation that the company would be taken private.
But there’s a better takeover target in the appliance/electronics retail space: Indiana-based hhgregg (NYSE: HGG).
The store operates in 20 states. With a market cap of around $373 million, the stock could be an ideal addition for investors looking for small-cap exposure, but there is more to the story.
The company has over $151 million in operating cash flow and no debt with a long-term growth rate of nearly 28%. The fact alone that a small-cap company is operating in a capital-intensive industry with no debt is impressive.
It also explains why hhgregg has already been mentioned as a takeover target.
Fortunately, no specific suitors have been mentioned, implying that investors could get lucky after purchasing shares. Better yet, the underlying fundamentals with hhgregg portend additional upside even without a takeover.
Stocks to Buy Now: Same Idea, Different Region
Keeping with the theme of appliance/electronics retailers, Conn’s Inc. (Nasdaq: CONN) is another regional play that has been strong to start 2013, with the potential to keep on climbing.
For investors considering both Conn’s and hhgregg, there is little regional duplication between the two companies as Conn’s stores are located in Texas, Louisiana, Oklahoma and New Mexico.
With all due respect to New Mexico, the allure of Conn’s comes via its Texas, Louisiana and Oklahoma exposure. The reasoning is simple: U.S. oil and natural gas production is booming.
In fact, the U.S. Energy Information Administration recently said the U.S. could be a net oil exporter in just a few years.
The aforementioned states are big reasons why.
Robust economies and job creation in those states could be a boon for discretionary retailers like Conn’s.
However, there are two risks with Conn’s that cannot be ignored.
First, the stock is heavily shorted with nearly 23% of its float sold short. Second, the company has a consumer financing business that is an important revenue driver. If the economy takes a sudden turn for the worse, that business could leave Conn’s vulnerable to some downside.
Stocks to Buy Now: High End, High Returns
Since coming public in late 2011, Michael Kors Holdings Ltd. (NYSE:KOR) has been a freight train of a stock, surging nearly 130%.
Following a post-earnings sell-off in February, the stock is up “just” 8% this year, but there are ample reasons to like this stock.
First, Michael Kors is exactly the type of stock that can perform well and even outperform in an environment of improving consumer, employment and housing data. Second, analysts have recently been bullish on the stock and have an average price target of above $74, implying upside of almost 35% from current levels.
Earnings are expected to nearly double this quarter. Any positive surprise combined with an earnings beat and higher guidance could send this stock rallying to fresh all-time highs.
We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.