Historically, the Christmas Season has been a bullish
time for stocks
Stocks have climbed an average of 1.6% during the final five days of the year and the first two days of the New Year, according to the Stock Trader''s Almanac. But stocks failed to follow the historical bullish pattern in 2012, pressured lower by fiscal-cliff fears and a lackluster retail shopping season, stocks fell in the past four trading sessions during the final trading week of the year.
Obviously, analysts who projected 3-4% growth in retail sales during the months leading up to Christmas, failed to consider the negative effect fiscal cliff fears would have on consumers. The uncertainty has resulted in consumers not spending as expected during the holiday season. However, spending still increased, albeit slightly. 'Sales of electronics, clothing, jewelry and home goods climbed 0.7% in the two months leading up to Christmas from the same time in 2011, according to the MasterCard Advisors SpendingPulse latest report.' This marks the slowest growth since the Great Recession of 2008.
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Despite being slow, retail sales were still growing amid the fear of higher taxes and lower government spending fears. And I take this as a bullish signal for 2013. Now that the fiscal cliff situation is resolved, consumers could likely kick into high gear, pushing retail higher in the first half of 2013.
[Related -Michael Kors Holdings Limited (KORS) Q2 Earnings Preview: In The Bag?]
I was happy to discover that I am not the only one who is bullish on the retail sector currently, when I learned several hedge funds share my retail sector bullishness, particularly Stephen Mandel''s Lone Pine Capital. This hedge fund has become heavily weighted with retail stocks. According to the latest SEC 13F filing, five of Lone Pine's top 20 holdings are in the retail sector.
Here's a closer look at two of its holdings.
1. Dollar Tree (Nasdaq: DLTR)
Lone Pine currently owns 11.8 million shares of this discount retailer, resulting in more than 5% ownership. In the third fiscal quarter of 2012, revenue advanced 8% during the same period in 2011. Comparable net sales climbed 1.6% to a little more than $1.1 billion and EBITDA exploded higher by 49% to almost $245 million. The stock is currently trading at around 16 times trailing earnings with a beta of 0.02%, which shows it clearly doesn't care whether the economy improves or not.
However, it will not take much of an increase in consumer confidence to push shares higher. Ultra-discount stores are known as being shielded from negative fluctuations in the economy. Other hedge funds such as Blue Ridge Capital and Renaissance Technologies also added shares of Dollar Tree to their holdings last quarter. Not to mention a 5,000-share purchase by a company director in November 2012.
Although the stock price was lower during 2012, shares have rocketed nearly 400% in the past five years on the back of growing corporate profits. It appears insiders and hedge funds are in this stock for the long term based on its historic performance rather than the short term. This is a huge positive for investors.
Technically, shares have built a base at support in the $38 range. Price has bounced up to the 50-day simple moving average, setting up an ideal breakout entry situation. Buying on a daily break out close above $40 a share with a 12-month target of $47 makes investment sense right now.
2. Michael Kors (NYSE: KORS)
Lone Pine also owns on the other side of the consumer spectrum with 8.8 million shares of fashion house Michael Kors. In the fiscal quarter ending in September 2012, revenue soared 74% to about $1.7 billion and net income exploded higher by 114% to just over $240 million compared with a year earlier. The stock price has reflected the growth by advancing more than 100% in the past year, sharply outperforming the S&P 500, Dow Jones Retail Titans Index (DJTRET) and the Dow Jones U.S. Apparel Retailer Index (DJUSRA).
The company has a market cap of close to $10 billion and a return on equity of nearly 45%, making it a solid player in the high-end retail space.
Technically, shares have pulled back into the value "buy" zone, finding support in the $48 range. The stock is a good boy now with a 12-month target of $60 a share.
Risks to Consider: Consumers could remain nervous about tax increases incurred from the fiscal cliff deal. Having said that, I think fiscal cliff fears will soon be a thing of the past Always use stops and position size wisely when investing.
Action To Take --> I like both stocks listed above as long-term investments. Dollar Tree as a breakout trade above $40 a share with stops at $38 and Michael Kors in the value "buy" zone with stops at $46 make solid investment sense for investors looking for exposure in the retail sector.
-- Dave Goodboy
DS Goodboy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.