Majestic Research

The Street.com

Five Top Retail Stocks to Buy Ahead of Q4

By Jeanine Poggi
Published: February 18, 2010

Indeed, even though the holiday season comprises a significant chunk of full-year sales results, fourth-quarter numbers hold little importance in the grand scheme of a recovery.

This, at least, is the contention of Wall Street Strategies analyst Brian Sozzi, who argues that what investors should be paying attention to are comments made by the managements of the retail companies about how 2010 is unfolding: How are booking trends? Are prices continuing to firm? What is the outlook for commodities in the second half of 2010?

And, of course, sequential sales improvements—as Sozzi notes, investors ideally should want to see acceleration in growth rates from the first half of 2009 to the second half.

Still, since most companies cut costs dramatically in 2009, even modest top-line growth could provide earnings leverage, says Craig Johnson, president at Customer Growth Partners, a retail consulting firm.

Strongest of all, though, would be those retailers that are able to produce sales growth without giving up the margin gains from the past year, says Chandi Neubauer, analyst at Majestic Research. “In 2009, fundamentals meant nothing; these stocks were trading on sentiment,” Neubauer says. “In 2010 we will see a move back to trading on fundamentals. If retailers don’t [improve] their top line, their stock will get hit.”

Thus, steer clear of retailers who announce plans for new store openings in the United States in 2010 or even 2011, Sozzi argues, as more work still needs to be done in the domestic economy before companies can resume growth.

Likewise, when it comes to guidance, Sozzi says he wouldn’t be surprised if only a few retailers laid their cards on the table for the full-year, or even the first-quarter, given the incremental weather that has plagued the United States since the beginning of the year. And those who do provide forecasts will most likely remain conservative, Citigroup analyst Deborah Weinswig wrote in a note.

Still, regardless of all these caveats, there remain a number of retailer stocks worth watching for their potential upside. Read on to see which ones they are—and what to look for when they report.