In my past two commentaries, I discussed the third-quarter gross domestic product (GDP) growth and October jobs growth. Both metrics looked good on the surface, but after closer inspection, there were clear gaps.
Both of the reports suggest that consumers may not be in the spirit to spend cash this holiday shopping season. With Black Friday just around the corner, for the retail sector, this one day of the year is critical and can generate a key portion of the year's total sales.
We are already seeing a mad dash by the retailers to open earlier on Black Friday and extend the shopping day. Some are opening at midnight, others before midnight.
At stake in the retail sector are the consumer dollars and the intense competition I expect to see, especially among the larger department stores. We may see J. C. Penney Company, Inc. (NYSE/.JCP) take one of its final gasps, as the company fights to survive with declining sales and dwindling cash.
In the retail sector department store area, I would stick with Macy's, Inc. (NYSE/M) and Nordstrom, Inc. (NYSE/JWN). Macy's and Nordstrom, along with Wal-Mart Stores, Inc. (NYSE/WMT) and Kohls Corporation (NYSE/KSS) will report quarterly results this week. The key to listen for in these companies' reports is what each has to say about the upcoming holiday shopping season.
The reality is that based on the soft personal spending component of the GDP along with the lower quality of jobs in the nonfarm payrolls report, I expect the retail sector will struggle through the holiday season.
I expect heavy discounting in the retail sector to attract shoppers and allow the retailers to reduce inventories. The GDP reading showed inventories were building up, which is perhaps in anticipation of the holiday shopping season, but I would not be that optimistic.
The areas in the retail sector that I believe will likely continue to fare well are some of the luxury brand stocks and discounters.
The luxury end looks good as the wealthy around the world continue to see their riches grow due in large part to the easy money flowing into the global economy and driving up stock market prices. This will likely continue into the foreseeable future. The eurozone just cut its interest rates to 0.25%. And here in America, the Federal Reserve continues to offer near-zero lending rates and pump easy money into the economy, driving up stock wealth.
In the luxury retail sector, my favorite stock is Michael Kors Holdings Limited (NYSE/KORS), which has proven over the last few years that it is the top in its group. I also like Tiffany & Co. (NYSE/TIF) in the jewelry segment.
Simply put, the rich will continue to spend regardless of the jobs market or GDP—which is good news for luxury retailers. Meanwhile, the middle class and working poor will continue to rein in spending, meaning the discount stocks will continue to benefit. And I don't see this changing anytime soon.
The top stocks in the discount retailers area include Family Dollar Stores, Inc. (NYSE/FDO) and Dollar General Corporation (NYSE/DG).
So as we get ready for Thanksgiving and the key shopping period, the retail sector will have plenty to prove to the market. In my view, a good investment strategy would be to diversify your retail holdings by playing both ends of the retail sector—discounters and luxury stocks.