Article Alert: Retail Stocks and the January Effect

While scanning the headlines, I found a great article in the Wall Street Journal from a few days ago that I’d like to share with you. Kevin Marder, who heads Marder Investment Advisors and is a regular on MarketWatch, highlighted a few market trends that you wouldn’t want to miss.

In a nutshell, he has noticed an uptick in institutional participation. Of course, this is consistent with the January effect, where stock prices are buoyed by the return of institutions and traders. Often, institutions sell stocks at year-end for tax reasons; once the New Year arrives, they turn around and buy stocks en masse.

And this year the institutions are flocking to retail stocks. This makes all the sense in the world, as I’ve discussed that the U.S. economy is consumer-driven and as discretionary income rises and consumers become more confident, retail stocks are poised to deliver outsized gains. However, I’d like to remind you that consumers are getting picky. This means that restaurants and retailers alike need to work even harder to differentiate themselves. In this environment, higher-end brands are doing well, as are those with a loyal customer base.

Many of the stocks that Mr. Marder points out in the article have a history of solid earnings announcements and have exhibited strength even though the stomach-churning activity last summer. More than a few of these stocks have been on my radar lately, and I’m similarly bullish about their prospects for this earnings season. I took the liberty of plugging his stock mentions into my PortfolioGrader system, and I’ll let the grades speak for themselves:

    • Approach Resources Inc. (AREX) — B
    • Chipotle Mexican Grill Inc. (CMG) — A
    • Dollar Tree Inc. (DLTR) — A
    • Fastenal Co. (FAST) — A
    • Lululemon Athletica Inc. (LULU) — A
    • Monster Beverage Corp. (MNST) — A
    • Panera Bread Co. (PNRA) — A
    • Starbucks Corp. (SBUX) — A
    • SXC Health Solutions Corp. (SXCI) — B
    • Tractor Supply Co. (TSCO) — A
    • Ulta Salon Cosmetics & Fragrance Inc. (ULTA) — A

However, Mr. Marder and I do diverge on one big issue–whether now is the right time to get involved with financial companies. Where he sees relative strength, I see red flags. Yes, some companies, like Bank of America (BAC) and Morgan Stanley (MS), did post surprisingly decent earnings recently, but like I mentioned in last week’s blog post, the devil is in the details. As an ex-banking analyst I can tell you that the rot runs deep with many of these banking companies, and I’m not touching them until they’ve gotten their finances in order.

That issue aside, I thought the article was a good read and worth passing on. After months of a seemingly endless stream of doom-and-gloom reports, it’s nice to see that some stock pickers are emerging from hibernation and seeing the forest for the trees. This is a stock pickers’ market, and the key to success lies in selecting growth-oriented companies that have a strong earnings history, just as Mr. Marder has done. As always, a great place to start is with my Portfolio Grader tool. Good luck, and happy hunting!

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