Think it's too early to start picking certain retail stocks in anticipation of a strong holiday shopping season? Guess again. When the Christmas trees go up (and they've been up since before October), the wheels start spinning. And, much like shoppers want to avoid the December mall rush, investors want to avoid the December rush as well by buying now.
It's a game of psychological chess; welcome to the market.
Just for the record, the forecasted increases in holiday spending is predicted to be up to 4.0% depending on the source, with a handful of guesses higher than that. When you drill further into different retail segments though, one can really pinpoint some hot and cold spots. These three picks are intended to tap into the areas that are expected to see the biggest improvements. (For related reading, see Holiday Spending Or Spending Holiday?)
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Bling
With jewelry sales up a little more than 10% over the course of the first half of the year, even half of that growth momentum would put the shine on some jewelers' holiday numbers.
A gut reaction may draw some investors to online discount jeweler Blue Nile (Nasdaq:NILE), particularly after it launched its iPhone app allowing users to find a great diamond and setting at a stunningly attractive price. The problem is, app or not, Blue Nile still hasn't translated "clever" into a "value". Annual revenue has been stagnant at the $300 million mark for three years now, while net income has been stuck around $12 million. With a trailing P/E of 50.4, that revenue would need to more than double to make NILE worth it.
Instead, consider Signet Group (NYSE:SIG) - operator of Jared Galleria and Kay Jewelers. The pros still doubt this retailer, and the stock (deservedly) keeps climbing the wall of worry. Despite six straight earnings beats, analysts still feel Signet is going to top calendar Q4-2009's earnings per share of $1.36 by only a penny in calendar Q4 of 2010. Through the first two quarters of 2010 though, Signet's income is ahead by 26%.
Time to Play
Recession or not, toy shopping is expected to stay brisk this year, as parents and family don't want to scrimp when it comes to the kiddies. Few consumers said they're going to cut spending on their children, making kids the smallest group of victims of planned spending cuts. In fact, more consumers are planning to up their toy spending in 2010 than on any other type of merchandise (excluding gift cards).
The "no-brainer" choices may seem like toy makers Hasbro (NYSE:HAS) and Mattel (Nasdaq:MAT). Despite being in the same industry, however, one stock really isn't as good as the other.
Hasbro has a strong history of earnings beats, topping estimates in each of its last five quarters, as well as in 10 of the last 14 (which includes the whole recession). Mattel, on the other hand, is a little more hit and miss on the earnings front. Though cheaper in terms of P/E, trading at 14.5 times the last 12 months' earnings, we've seen just as many misses as beats over the last 10 quarters, with one of them coming last quarter.
Go with Hasbro.
Plug It In
Surprise, surprise - consumer electronics sales are expected to be strong holiday shopping items in 2010, at least according to Standard & Poors. Yet, those shoppers are also expected to keep their electric purchases on the lower end of the price scale. Translation? Visions of e-readers and tablet computers aren't dancing in their heads. So, not that Apple (Nasdaq:AAPL) really needed the help, but don't look for Christmas sales to boost iPad revenue.
Instead, this is a case where the obvious choice may well be the best one - Best Buy (NYSE:BBY). BBY pretty much sailed through the recession as if it weren't happening. With the stock trading at a mere 12.3 times trailing earnings, and with the company on pace for record per-share earnings this year, it's tough to expect anything less than tall results again now that shoppers are off of life support.
The Last Word
Bear in mind that perception, disappointment and expectations can affect a stock price as much as a valuation can. While these stocks hold their own (and then some) on the value scale, being able to exceed expectations and "wow" investors this shopping season will be an equally important component of their success.
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