Saturday, January 21, 2017

Are Retail Stocks a Bargain or Not?

"Everyone likes buying a bargain, but catching a falling knife is no fun at all." ~ The Wall Street Journal, 1/21/16

With the poor results reported by Macy's, Kohl's, Sears, and Target department stores, the retail stocks have taken a significant hit over the past couple weeks.  Many are near their 52 week lows and some have made new 52 week lows.  And some are paying annual percentage dividends in the mid to high single digits.

Very tempting, yet still risky since prices could continue to fall further.

My current thinking is to avoid department store retail, which I believe has the biggest downside risks.  So I am not buying Macy's, Kohl's, Sears or Target stock at this time.   Unfortunately, we already own J.C. Penney's, which is unlikely to rebound either.

To me, the biggest opportunity are off-price retailers, such as T.J. Maxx an Ross Stores.  These stores buy overstocks from department stores and sell the items at reduced prices.    However, neither has declined much, with Ross Stores still near its 52 week high.

The next best opportunity is specialty retail.   Several stocks in this sector are paying 5-8% dividends, meaning the downside risk is somewhat mitigated.  And I get paid to wait, for the eventual (hopefully) recovery.  Companies that I include in this category are Guess?, The Buckle, Abercrombie and Fitch,and Staples.

So for now, retail is a selective bargain, which I need to sort through before making a purchase.

Disclosure:  We own shares in J.C. Penney's, T.J. Maxx, Guess?, The Buckle, Staples and Abercrombie and Fitch.

For more on Reflections and Musings, check back Saturdays for a new segment.

This is not financial advice. Please consult a professional advisor.

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