Investors marking up retailers, Part I: Shoe-Ins

The tale on retail
Contrary to the continuing negative news that consumers are keeping their pocketbooks closed, the retail sector has recently come out of the closet, easily out-performing most other sectors including tech, energy, and basic materials. The XRT, one retail ETF (another is the RTH), has performed about as well as the XHB, the homebuilder ETF. Both have gained over 90% since the March lows and only the financials (XLF) and insurance (KIE) sectors have performed better.

So, is this a sign that the economy is indeed on the road to economic recovery or is it just a reaction to an extremely oversold situation?

Probably a little of both. In an article appearing earlier today in, October retail sales are inching upward with same store sales doing better than expected. According to the chief economist at the International Council of Shopping Centers who keeps track of these data:  “The trend improvement is providing evidence that the retail sector recovery is starting to unfold.” Other retail analysts agree with this sentiment as they’ve recently upgraded Pacific Sunwear (PSUN) and Macy’s (M).

Not being an economist but rather an interpreter of price patterns and technical indicators, it seems to me that no matter what the reasons are behind this turnaround it looks as if we can continue to count on gains in the retail sector–that is, provided that overall market sentiment continues to be bullish. I think that once earnings numbers start rolling in, we’ll have a better picture of where retail is headed. One particular “tell” will be forward earnings projections, especially for the holiday season.

With this caveat in mind, let’s see try on the retail sector and see what stocks could flatter our portfolios. Since retail comprises many distinct and diverse industries, I’m going to break up this space into several articles.  Today, we’ll begin our portfolio shopping in a girl’s second favorite place:  the shoe store.

Putting the best foot forward
Many footwear industry stocks have made a giant leap forward in recent months which is not surprising since the group as a whole was grossly oversold. In particular, Crocs (CROX) was down 90% from its all-time high.

My picks in this space: It’s been said that the woman’s credo is that one can’t be too rich, too thin, or own too many shoes. Unfortunately, when it comes to shoe companies there’s only a few names I’d consider adding to my retail portfolio:

Skechers (SKX):  The stock recently broke $19 resistance and is now trading over $20. Next level of major resistance is $25. It recently signed licensing agreements with companies in India and Mexico. It’s P/E is higher compared with the industry average but that may be meaningless considering the revenue growth potential. Upcoming earnings are estimated at $0.34, up 52 cents from the previous quarter, with the company scheduled to report sometime between October 23-November 2.

Steve Madden (SHOO):  The stock recently broke a couple of key resistances and is now lumbering on to test its all-time high of $45. Earnings growth has accelerated in recent years, and the current quarter is expected to beat last year’s earnings by two cents ($0.64 vs $0.62). The company will report earnings sometime at the beginning of November.

Crocs (CROX):  Sure their shoes are butt ugly but there are a couple of reasons to like the stock. First, it’s threatening to break out of a trading range which has hampered it for several months. Second, my favorite two contrarians, Jim Cramer and the Motley Fool, both hate it thinking it’s a one-trick pony. That, in and of itself, is something to love. In their defense, I, too, hate their iconic sandals.  But wait, there’s more!

This company is trying not to be a one-trick pony.  They now sport a catalog of men’s, women’s, and children’s footware. Some look to be as stylish as they are comfortable. I don’t think even Cramer would mind killing cockroaches on his kitchen linoleum in their Santa Cruz canvas houndstooth loafers.  (That’s probably not a great advertisement for the product.)  If Crocs can keep up the good work and throw some bucks towards decent advertising, I think they have a good chance at footware survival.  (They should toss in some low-priced handbags and socks into the equation, too.)  Company earnings have been rising although they’re still operating in the red. They’re expected to report earnings sometime in the second week of November.

Nike (NKE): Nike recently blew past major resistance at $60. It traded as high as $65 and has since retreated half a shoe size. What I like about this company is its name recognition which it heavily promoted at the Beijing Olympics. The company is intent on making further inroads into the Chinese youth market by working on reducing operating margins along with cross-promoting itself with other hot brands such as Apple.  Nike beat earnings by seven cents on September 29 causing the stock to jump over 8%; next earnings is scheduled for December 17th.  Watch this one!

Brown Shoe (BWS):  Brown Shoe not only incorporates its namesake children’s shoe, Buster Brown, but also adult styles such as Via Spiga, Naturalizer, Dr. Scholl’s, Life Stride, and specialty lines such as Vera Wang. The stock is in the process of breaking out of a several month consolidation pattern–anything over $10 on heavier than average volume is an entry point. Major resistance is at $12. The company will report earnings near the end of November and it has consistently paid a dividend.

Tomorrow we’ll take a look at apparel retailers.  Here’s the weekly chart on Crocs.

CROX Weekly Chart 10-13-09

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