Retail stocks on the shelf

While analyst David Strasser expects the sector to finish the year higher, he says investors should wait for a pull-back before buying.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Suzanne Kapner, writer

Fortune 40: The best stocks to retire on
After a bleak 2008, equities are looking up. But whatever the market, our trademark long-term portfolio can help you build a nest egg for a secure future.
When will the government come up with a plan to reform health care?
  • By the end of the year
  • By the end of Obama's term
  • It won't happen
CDs & Money Market
MMA 0.69%
$10K MMA 0.42%
6 month CD 0.94%
1 yr CD 1.49%
5 yr CD 1.93%

Find personalized rates:
 

Rates provided by Bankrate.com.

NEW YORK (Fortune) -- He's worked on both the sell side (Bank of America and Citigroup) and the buy side (Andor Capital Management.) Now as retail analyst David Strasser settles into his new job at Janney Montgomery Scott, he talks to Fortune about retail stocks, the economy and whether consumers are every going to start shopping again.

Q: Retail stocks have had a nice rally since March. Does this mean the worst is behind the group? And if so, should investors wait for a pullback before buying?

I don't expect these stocks to break out to new highs any time soon. Take a look at Home Depot (HD, Fortune 500). They just had an analyst meeting and it seems pretty clear they are going to beat second-quarter earnings estimates (when they report on Aug. 18th). Wall Street is expecting sales at stores open at least a year to be down in the high single digits, but it looks like sales are only going to be down in the low single digits. Yet, the stock hasn't moved much higher.

Still, I think there will be buying opportunities throughout the summer as these stocks pull back a bit heading into the big fourth-quarter finish. I am looking for the group as a whole to end the year on a stronger note. Retailers will be up against easy comparisons (from the 2008 holiday season), inventory should be light and so we'll see fewer markdowns.

Q: Is there anything the market is misreading about retail stocks right now?

I think food inflation will be higher than what the market expects. Last year, food commodity prices were up 5%. The market is looking for flat to slight inflation this year, but I think we could see inflation as high as 3% to 4%. That bodes well for retailers that sell food like Costco (COST, Fortune 500), BJs Wholesale Club (BJ, Fortune 500) and Wal-Mart. (WMT, Fortune 500)

Q: What on the horizon worries you most for the retail sector -- rising gas prices, unemployment or the possibility that consumers have permanently rest their buying habits to a lower level?

The two things that worry me most are gas prices and interest rates. I'm less worried about gas prices, because they tend to peak around July 4th. So there's a good chance we could end the year with lower gas prices than we are seeing now. But rising interest rates could stop consumer spending in its tracks. It would put the brakes on the housing market and hurt refinancing -- pretty much anything that is helping to put money back into the economy.

Q: Which stocks do you like and why?

I like Radio Shack (RSH). It's a bet on mobile communications. They have about 10% of the retail mobile phone market. They remodeled the part of their stores that sell wireless devices and they've increased commissions for employees selling the devices, both of which should help sales. They had the Palm Pre phone on launch day, which is the first time they've had a new product on opening day in awhile. They didn't have the Samsung Instinct for a few months and they never got the iPhone.

Target (TGT, Fortune 500) will have a better 2009 than it did in 2008. They were taken by surprise by the severity of the slowdown. They are more prepared today. They are still stocked more for want than for need, but they are shifting the mix more toward need by adding more consumables like household products and food.

Q: Aside from monthly sales figures and unemployment, what are some of the other -- and perhaps less obvious -- data you look at to gauge retail performance?

I'm looking closely right now at the availability of credit at the store level. During the bubble, probably about 85% of the country was given credit, when really only 65% of consumers are actually credit-worthy. So we are swinging back toward that 65% level, which is a good thing, but it's really painful for retailers, especially for sales of big-ticket items. To top of page

Company Price Change % Change
Bank of America Corp... 28.91 0.46 1.62%
Advanced Micro Devic... 29.75 1.37 4.83%
General Electric Co 8.80 0.35 4.14%
Freeport-McMoRan Inc... 9.55 0.59 6.58%
Apple Inc 236.21 6.12 2.66%
Data as of Oct 11
Index Last Change % Change
Dow 26,816.59 319.92 1.21%
Nasdaq 8,057.04 106.26 1.34%
S&P 500 2,970.27 32.14 1.09%
Treasuries 1.75 0.09 5.67%
Data as of 7:54pm ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.