Cyclical Retail: Will This Segment Keep The Recovery Going?

| March 23, 2011 | 0 Comments

In the midst of utter world chaos, one American retailer reports blowout earnings.  And amazingly, during one of the worst five day stretches in the Dow, their stock skyrockets!  We’ll chat about them in a minute.  But first, I want to address the chaotic trading going on.

Right now we are seeing the markets driven by headlines.  If there’s good news out, the markets go up.  If bad news hits the wires, we see a big sell off.

So with the markets being headline driven these days, it’s tough to decide where to invest.  Will the natural disaster in Japan continue to lead us lower?  Will QE2 continue to buoy equities?  Will Middle East unrest drive oil higher?  Will inflation force interest rates higher?

The markets can’t seem to keep a steady path lately.

But in one industry, a clear trend seems to be emerging (despite the crazy headlines).

Retail sales continue to forge higher.  February 2011 retail sales figures came in at a solid $387.1 billion.  That makes for the 8th straight month of retail sales improvement.  It’s the largest increase in the past four months.  And it’s only getting better!

One by one, retailers’ earnings are catching the rebound.  So what retailer recently announced record numbers?  None other than Williams Sonoma Group (WSM)…

They posted record Q4 profits for 2010 and the stock shot up over 13% in one day!  Net income climbed to $113.4 million from $88.4 million in the same period a year earlier.  That’s a 28% jump!

In addition, the company raised their quarterly dividend by 15% to $0.17 per share.  And WSM just announced a $125 million stock buyback program.  This company is clearly headed in the right direction…

While that’s great news for current shareholders, potential investors also have something to be excited about.  You see, management estimates double digit growth for the next five years in their “direct to consumer” sales model.  That’s a fancy way of saying online sales.

For an established brand name like Williams Sonoma, growth like that is both amazing and refreshing to hear.

So what does it tell us about the rest of the retail sector?  We’re only in the first few innings… We have a long way to go!

There’s no doubt American retailers will continue to surge higher… WSM’s results confirm the recovery in the retail sector.  And I don’t think the run is over for this group.  The United States always recovers on the back of the consumer.

And it’s happening again…

If the trend continues, Williams Sonoma will prove to be a great investment… But they won’t be the only ones to benefit from this recovery.

You see, companies with cyclical economic cycles are wound up and ready to spring.  We want to be invested in companies leveraged to the consumer.  Companies just like Williams Sonoma…

And I couldn’t think of a better way to hop on the retail recovery train than through an ETF.

Now, you’ll find a handful of retail ETFs out there to choose from.  But my favorite ETF for cyclical retail is the Spiders S&P Retail Holdings (XRT).  I’ll tell you why…

XRT is extremely overweight in cyclical stocks.  And as you know, cyclical stocks take advantage of an economic recovery better than defensive companies.  They perform at the whim of the economy and discretionary spending…

XRT holds 78% cyclical stocks with just 20% defensive companies.  For those of you doing the math, the other 2% is in industrials.

Just take a look at XRT’s top ten holdings and you’ll quickly see they’re mostly cyclical.  Some of these names include Chico’s FAS, Jos A. Bank Clothiers, and Ascena Retail Group…

In addition, XRT holds only US companies.  It’s an easy way to capture part of the US recovery, while avoiding those big global headlines I was talking about earlier!

In headline driven markets, I like to look for strong performers.  And the best industry is retail right now.  Especially cyclical stocks that will outperform in an economic recovery… just like WSM.

Now’s the time to jump on board and ride the retail train higher.  A year from now you’ll be glad you did!  Consider adding XRT in your portfolio.

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Category: ETFs

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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