Trend-Spotting in the Retail Sector

By Chloe Lutts

Peak Perception


Spotlight Stock

Note from Cabot Wealth Advisory Editor Elyse Andrews: Chloe Lutts, editor of Dick Davis Digest and Dick Davis Income Digest is back writing for Cabot Wealth Advisory this month. This time Chloe discusses the boom in retail stocks and an investment for this trend. Enjoy!

As the editor of Dick Davis Digest and Dick Davis Income Digest, I do a lot of reading. Hundreds of contributing editors send us their investing newsletters, and I read them all.

Reading all these different financial commentators, advisors and investors paints a very interesting picture of the state of the market and economy. They never all agree. Usually, some are predicting a yearlong decline just over the horizon, while others are certain the market will keep going up for another two or three years, and most are somewhere between those two extremes.

They usually don’t recommend the same stocks either. In fact, it’s not uncommon for one advisor to recommend buying a stock while another recommends shorting it.

In very recent history, the editors were divided over the importance of the SEC’s accusation of fraud against Goldman Sachs. Some said this was the beginning of the next bear market; others said it was near insignificant.

However, there are often noticeable trends as well. One week it will be a rash of Apple recommendations, the next, a chorus of “buy gold.” The only thing this ever tells me for sure is that a lot of people out there are thinking about the same thing. But using that information to make good investments is anything but simple.

Sometimes, if you catch on to a trend early enough, you can make a lot of money. As more and more people climb on the bandwagon, by investing in Apple or gold or airlines or what-have-you, more money is going to flow into that sector, stock or investment vehicle. However, at some point–the point of peak perception–all of that attention becomes a liability.

When a stock or sector reaches the point of peak perception, practically everyone interested in investing in it already has. It’s already gone way up, thanks to all those people pouring money into it, and has become popular cocktail party conversation fodder. At this point, there’s nowhere for whatever it is to go but down.

So a consensus among the newsletters I read can be a double-edged sword. Catch on early enough and you may be in for a great ride. Wait until the point of peak perception and you may feel like the teenage girl who was the last person in her class to buy a pair of trendy Ugg boots … right before everyone else stopped wearing them.

Which brings us to the subject of my Cabot Wealth Advisory today, and the latest trend to emerge in my reading: Retail. It’s back.

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Our latest issue of Dick Davis Digest not only featured an apparel company as our “Spotlight Stock,” it also included five other retail stocks and a consumer discretionary ETF, or exchange-traded fund. The rationale behind most of the recommendations was simple: After over a year of scrimping and saving, Americans are shopping again.

Though unemployment (a lagging indicator) is still high, employers created 162,000 new jobs in March, the most in three years. And over the past 12 months, average hourly earnings have risen by 1.8%, leaving consumers with more disposable income.

Partially as a result of the improving job market, consumer confidence is at its highest level since September 2008. (The Conference Board, a private research group, measures consumer confidence using an index based on how shoppers feel about business conditions, the job market and the next six months.) The index’s April level of 57.9 reported last week was up from 52.3 in March and an all-time low of 25.3 in February 2009.

Consumer spending statistics are also improving. Personal consumption expenditures have increased every month for the last six months, and grew 0.3% in February (the latest month of data available from the Bureau of Economic Analysis). Consumer spending is estimated to have increased 3.3% in the first quarter of this year, up from a 1.6% increase in the fourth quarter of last year. And retail sales increased 1.6% last month.

The uptick in consumer spending has been reflected in recent corporate earnings releases. Companies raking in consumer dollars include flat panel TV screen maker Corning (GLW), Royal Caribbean Cruises (RCL), appliance company Whirlpool (WHR) and apparel companies Phillips-Van Heusen (PVH) and Talbots (TLB).

Tangential and anecdotal data confirm the trend as well; a recent New York Times article said New Yorkers are showing their greater confidence in the economy by buying and wearing colorful prints (or it could just be springtime, but I’ll leave that distinction to the fashion writers).

All of this data is seen and digested by the advisors who send me their newsletters, and has resulted in a rash of retail recommendations. Yes, shopping is back.

But what about that point of peak perception? Is the retail consensus so strong that it poses a threat to the continued growth of the sector? I don’t think so. Retail is growing because consumers are spending more, and there’s no reason to believe they’re going to stop. Even people who didn’t lose their jobs or see their hours cut back during the recession became more cautious about their spending, putting off big purchases and reducing discretionary spending. But now consumers’ confidence is increasing, and they’re ready to get that washing machine, or maybe just buy a couple of new pairs of shoes for spring. And when unemployment does improve, a whole new crop of consumers will begin spending again as well. It’s what news outlets are calling pent-up demand, and I think it’s pretty strong.

So, where should you put your money if you want to benefit from this rebound?

One great option is a small apparel company stock that was featured as the “Spotlight Stock” in the most recent issue of the Digest. SmallCapInvestor PRO Editor Ian Wyatt originally recommended Joe’s Jeans (JOEZ). Wyatt wrote:

“The latest addition to the Small Cap Investor PRO portfolio is Joe’s Jeans, a denim company that is looking to follow in True Religion’s footsteps. … By adding Joe’s Jeans to the portfolio, I’m tapping into many of the same positive trends that we enjoyed when we purchased shares of True Religion: an extremely popular brand, a great quality premium denim clothing, a well run small company, and a growth strategy that looks very promising. …  

“The last two years were forgettable for the majority of retailers. In inflation-adjusted terms, consumer spending fell by 0.2% in 2008 for the first time in 28 years. Then it fell a further 0.6% in 2009. … But there were some exceptions, and denim was one of them. Sales of jeans grew by 3.5% in 2009 as middle-income shoppers clung to their aspirations of looking good in denim, regardless of what economists said was going on. In 2008 and 2009, Joe’s Jeans grew revenues by 10.2% and 15.8%, respectively. That’s pretty darn good, and even more impressive is that the company turned the corner to profitability in 2007 as it grew during this latest recession. That’s the power of good management, a good brand, and amazing customer loyalty.”

A clothing company that managed to increase revenues during the recession is a story worth paying attention to. And this is no dollar store benefitting from consumers “trading down.” As Wyatt wrote, the key to the company’s performance was good management and great product offerings that attract and keep customers. JOEZ may be a small cap stock, but Joe’s is a big name in the fashion world.

Bottom line, I think now is a great time to get in on the retail resurgence, and I think JOEZ is a great way to do it.

Wishing you success in your investing and beyond,

Chloe Lutts
Editor of Dick Davis Digest
For Cabot Wealth Advisory

Editor’s Note: Chloe Lutts is the editor of Dick Davis Digest, which has provided investors with the best investment advice from hundreds of top financial newsletters for nearly 30 years. There’s no better way to survey the investment landscape. Throughout the decades it’s become an indispensable tool of tens of thousands of investors just like you. Click below start getting the best advice from the best minds on Wall Street today!


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