Retail Stocks a Good Buy This Holiday Shopping Season?

By Moe Zulfiqar

Over the weekend, I had a chance to meet with my friend Mr. Speculator. We talked about portfolio management, the overall market condition, and what may be next for the U.S. economy. During our conversation, what was interesting to find was that Mr. Speculator has turned bullish on retail stocks. I asked him why, and he said it’s because shopping season is coming up. His argument was that retail stocks are going to see some buying and their prices will increase. “Just think of it this way,” he said. “The more people buying their goods, the higher their profits are going to be.”

Like always, Mr. Speculator has the general theory right, but he is missing a few details that could derail his theory of retail stocks being hot in the next few months.

Why? Because consumers in the U.S. economy are becoming cost-savvy, meaning they are looking for deals and deep discounts. When retailers put on a sale, their profit margin isn’t as high.

For example, during the back-to-school season, consumers in the U.S. economy weren’t as enthusiastic and the demand was not as robust, so retailers had to provide deep discounts.

“They seem to be above the norm,” said Ken Perkins, president of Retail Metrics, a retail industry research firm. “That was emblematic of just the lack of demand for back-to-school.” (Source: Skariachan, D., “U.S. retailers rely on deep discounts to win back-to-school shoppers,” Reuters, September 5, 2013.)

But to be fair, we know that back-to-school shopping season is over.

So what’s next?

To put it mildly, the holiday shopping season isn’t looking great, either. Consumers in the U.S. economy still seem to be concerned, as it appears they just don’t want to spend.

Halloween is just around the corner. According to a survey done by the National Retail Federation, the number of consumers going Halloween shopping in the U.S. economy this year will be less than in previous years. In addition, they will also be spending less. When it comes to Halloween goods, 158 million consumers in the U.S. economy plan to spend $6.9 billion this year, compared to $8.0 billion and 170 million consumers in 2012. (Source: Grannis, K., “The (not so) spooky stats for Halloween 2013,” National Retail Federation web site, September 25, 2013.)

This just doesn’t end here, dear reader; the problem is at the very core. Consumers in the U.S. economy are becoming cost-savvy because they are uncertain about their future, as we have millions of Americans who are unemployed, and/or on food stamps.

In times like these, it isn’t surprising to me at all that consumers are stepping back from spending more. They will start spending once there are good jobs created in the U.S. economy and they are happy about their future. As for the retail stocks, they don’t look as attractive going into the holiday season.

Despite Mr. Speculator’s confident optimism, I would be cautious when it comes to retail stocks this holiday season.

This article Retail Stocks a Good Buy This Holiday Shopping Season? was originally published at Daily Gains Letter