Can Carl Icahn Revitalize Retail ETFs? [Family Dollar Stores, Inc., Five Below Inc, Dollar General Corp., Dollar Tree, Inc.]

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June 13, 2014 4:13pm NYSE:RTH NYSE:XRT

Carl Ichan1If you want to invest like billionaire activist investor Carl Icahn, you need to have full faith on the U.S. retail industry. Last week, Icahn along with his affiliates bought a 9.4% stake in the discount store retailer Family Dollar Stores Inc. (NYSE:FDO) for nearly $265.8 million.

Following the news, shares of FDO surged 13.4% on June 9, 2014 (read: Is It Finally Time to Buy Retail ETFs?).

Many other value-oriented or discount retailers also joined the party thrown by Family Dollar. Dollar General Corp. (NYSE:DG) jumped 7.35%. Fred’s Inc. (NYSE:FRED) was up 1.04%. Dollar Tree Inc. (NYSE:DLTR) and Five Below Inc. (NYSE:FIVE) added 0.65% and 0.85%, respectively. Big Lots Inc. (BIG) – broadline closeout retailer – gained 2.77%.

Retailers had a shaky start this year thanks to one of the coldest winters which locked shoppers inside and weighed on the sales of the company. Tepid consumer recovery and reduced purchasing power have made the retail sector one of the weakest price performers among the 16 Zacks sectors from a year-to-date look.

Spending at U.S. retailers stalled in April after a rise in the prior month. Sales in April nudged up 0.1% while it grew 1.5% in March. However, retail sales are largely related to consumer confidence. While confidence dipped in April, it improved in May, though slightly. Thus, we expect, in line with the general sentiment, retail sales to see an uptick in the days ahead.

In such a downbeat backdrop, Icahn gave a sweet surprise to retailers at large.  Not only Icahn, some other esteemed investors like Nelson Peltz’s Trian Fund Management LP and John Paulson’s Paulson & Co. have acquired a 7.4% and 5.7% stake in Family Dollar, respectively. In fact, the SEC filing related to Icahn’s stake purchase indicates “great long-term potential” in the discount retail industry.

One can’t deny gradual recovery in the U.S. economy as confirmed by the multi-year highs in the stock market, a decent labor market and the steady wrap-up of the Fed’s QE stimulus (read: Inside the Volatility ETF Crash: Is a Rebound Coming?). It is probably because of customers’ cautious spending pattern that the sector is not enjoying the all-out spending bliss.

While mostly discount retailers rallied following the FDO news, we believe the move can act as a cornerstone to the entire industry. Whatever the case may be, retail sales should sooner or later surprise investors who have turned away.

Those who share their views with Carl Icahn might try out the retail or consumer discretionary ETFs mentioned below as a basket approach is far better than a single stock pick in this market uncertainty.


This product looks to track the S&P Retail Select Industry Index, holding 104 stocks in its basket. It is widely spread across each component as none of these holds more than 1.47% of total assets.

In-focus FDO has 1.01% share in the fund while BIG has 1.21%, DG has 1.02%, DLTR has 1.03% and FIVE has 0.96%. In fact, XRT has wide exposure to discount-retailers.

In terms of sector holdings, apparel retail takes the top spot at one-fourth share.  The fund has amassed about $607 million in its asset base. The ETF charges 35 bps a year in fees.

XRT added 0.29% in the key trading session and 2.62% last week. The ETF has a Zacks ETF Rank of 2 or ‘Buy’ rating with Medium risk outlook.

Market Vectors Retail ETF (NYSEARCA:RTH)

This fund follows the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket with AUM of $28.5 million. Expense ratio comes at 0.35%. The product is heavily concentrated on the top 10 holdings with more than 60% of assets with the largest allocation to Wal-Mart. Discount retailer Dollar General accounts for 3.14% of the fund.

Sector wise, specialty retail occupies the top position with less than one-third share. RTH added about 1.94% last week and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

Bottom Line

Thanks to being beaten down this winter, consumer discretionary or retail stocks have some scope for a run-up in the coming days. The tone of retailers is broadly muted, but the sector is still expected to log 8.5% earnings growth in 2014 and 14.3% in the following year. This should encourage investors with a strong appetite for risk to invest in retail ETFs such as the ones described above.

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