One Retail Stock and One Financial Stock that Look Good Today

With sector rotation rearing its head on several occasions this year, it can be difficult to pin down which sectors are hot in a given moment. Two sectors I’m watching today are retail and financials—and there’s one retail stock and one financial stock that look particularly attractive. More on those in a bit.

The market spent much of the summer consolidating its heady early-year gains, but the action since mid-August has been very encouraging. By my measures, the intermediate-term trend has turned back up (it was sideways-to-down for much of the summer) and the broad market is making a nice comeback.

As I discussed in my Cabot Weekly Review video last Friday, this improved evidence has me putting some money back to work. I was never very defensive in the summer—the long-term trend was up and the action of leading growth stocks was mostly fine—but the renewed push higher has me doing some buying.

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I’m keeping an eye on some other areas beyond the growth stocks, though. This year has been led by a relatively narrow list of leading stocks; many indexes made little-to-no progress from the start of March through mid-August—and that includes the S&P 500, which was up less than 1% during that five-and-a-half-month stretch!

Now, I’m starting to see the buying pressures broaden out. Below is one example of that—the chart shows the relative performance (RP) line of the growth-oriented Nasdaq versus the stodgy Dow Industrials. (Up means the Nasdaq is outperforming the Dow, and vice versa.)

You can see the line moved pretty much straight up through May, but since then has gyrated, and as the market has rallied in September, the RP line has been slipping a bit. Obviously, this is more descriptive than predictive, but it’s telling you that, while many growth stocks remain in good shape, some of the lagging areas are finally finding buyers.

Today, I’ll talk about the two sectors I mentioned in the open—should the broadening effect continue (or if we see some outright rotation out of growth and into other sectors), I want to be ready. The trick for me, though, is to find stocks that have the combination of a great growth story, good numbers and a solid chart within these groups.

Here are a few ideas.

Is This Retail Stock about to Break Out?

The first is a retail stock, a sector that has been battered this year as consumer spending has stagnated and perception of anything mall-based has crashed, thanks in part to Amazon’s dominance. I have no interest in the beaten-down retail stocks like J.C. Penney (JCP) or Macy’s (M), but there are many interesting cookie-cutter ideas to follow.

One is Five Below (FIVE), a retail stock I’ve stalked for a long time (and even bought once without much success; we got out a bit north of breakeven last spring). The company’s dollar store-ish business model (everything sells for $5 or less), focus on teen and pre-teen merchandise, dynamic store economics (payback for a new opening occurs in about a year) and rapid store expansion plan have contributed to steady 18% to 25% growth. The stock has a big basing pattern going back years, but has etched a tighter consolidation during the past few months. A decisive leap above 54 would be VERY interesting to me.

Five Below (FIVE) is a retail stock trending in the right direction - and could be VERY interesting if it breaks above 54.Another great cookie cutter story is Planet Fitness (PLNT), which has a national brand name, a high-margin licensing strategy and a solid store expansion plan (going from 1,400 locations now to 2,400 within five years or so). Like FIVE, PLNT is a retail stock that has been creeping higher despite the retail sector’s woes. Neither FIVE nor PLNT are likely to be “hot” stocks, but big investors are usually willing to pay up for long-term growth stories with a good degree of reliability, which both these stocks have.

Financial Stocks Recovering

The second sector to watch is financials, which had a big, big shakeout on fears surrounding Hurricane Irma earlier this month (insurance stocks were clobbered, and some are still in the tank on fears of Maria) but have snapped back impressively since, approaching all-time highs. Note, too, that financial stocks leapt out of a huge two-year base following last year’s U.S. election and have done little since March, so I think the sector has another leg up coming—and it’s looking like it could be soon.

Within financials, I’m most intrigued by what I call Bull Market stocks—brokerages, asset managers and the like that directly benefit from higher prices and (eventually) more activity. Many brokerages look good, including TD Ameritrade (AMTD), but my favorite right now is E*Trade (ETFC), which is etching a tight base (39 to 42 since late July) on top of a deeper consolidation that began back in January.

Fundamentally, the bull market is certainly helping. In August, for instance, trading activity rose 44% from a year ago while customer assets were up 21% and margin balances rose 31%. I think ETFC could be a steady big-cap leader if financials emerge.

All told, I’m still riding growth stocks for all they’re worth, but from what I see under the market’s hood, some new leadership could be set to emerge if the rally broadens out. FIVE and ETFC are two of my favorites, and I’ll be looking for more in the weeks ahead.

Michael Cintolo

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Michael Cintolo is a growth stock and market timing expert. His Cabot Growth Investor, with its legendary Model Portfolio, is recommended for all investors seeking to grow their wealth.

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