The Retail Resurgence Is a Rare Opportunity
One place I’m putting my money to take advantage of this downturn?
The sell-off of recent weeks knocked down the stock prices of many. It turned this already undervalued group of companies into a heavily undervalued group.
Yet the news keeps getting better for retailers.
- Lost in last week’s storm of selling was a report from the National Retail Federation, which sees retail sales rising as much as 4.4%.
- We have a U.S. economy that’s still charging higher.
- Wages are rising. The Labor Department said average hourly earnings rose nearly 3% in January from year-ago levels.
Because of corporate tax reform, many of the larger employers in the U.S. economy are handing out worker bonuses.
And what do most people do when handed a bonus? They spend it.
Retail Strikes Back
On top of the sell-off, we have the overblown “retail armageddon” story, which continues to depress many of the stocks in the group.
My view is that the weakest retailers, like Sears, and other marginal store brands were already on their way out. All they needed was for Amazon (and their own competitors) to shove them out the door.
The fact is that plenty of retailers have already figured out how to “do” online sales.
Walmart Inc. (NYSE: WMT) showed the way. Its online sales rose 50% in the third quarter last year. It reports fourth-quarter and annual figures on February 20.
At Home Depot Inc. (NYSE: HD), online sales now make up more than 6% of its total revenues, and it’s rising. The company’s grown its digital channel by roughly $1 billion a year since 2014. The home improvement retailer also reports its latest earnings on February 20.
And those are just two of the “biggies” in the sector.
How to Play This Rare Retail Opportunity
Most retail exchange-traded funds (ETFs) have been beaten down about as much as the overall stock market so far, losing 10% to 15% of their value. Given the trends above, that makes right now a great time to buy.
I’d look at the PowerShares Dynamic Retail ETF (NYSE: PMR).
Before Wall Street’s selling squall, the ETF was already on its way to hitting its old highs from 2015. I think it will do so again even if the broader market cools off because of the undervalued nature of many retailers.
The ETF has an intriguing mix of companies, with nearly 20% of the portfolio devoted to large-cap value stocks in the group, such as Best Buy Co. (NYSE: BBY), Walgreens Boots Alliance Inc. (Nasdaq: WBA) and others. About 40% of the portfolio is weighted in smaller companies that are growing faster than the sector as a whole.
The game is slowly changing for heavily indebted American consumers. Interest rates are heading higher, which means it’s that much more expensive to carry a credit card balance.
But for now, the old rules still apply. Consumers have more money in their pockets. And the share prices of many of the store chains they shop in are undervalued. A rare retail opportunity is presenting itself.
I think we’ll see the PowerShares ETF rise in the next six months.