About a month ago, I wrote that the Weiss Ratings Model was warming up to the retailing industry, and I mentioned ratings picks and pans. And returns of the various stocks reveal a lot about why I stick to the discipline imposed by the Ratings Model universe.
Since I wrote that Money and Markets column on retail, of the two stocks I cited as ones to avoid — Best Buy (BBY — rated C-) and J.C. Penney (JCP — rated D+), only JCP has seen any positive movement in the Weiss Ratings ranking (to D+ from D).
That said, both stocks have blasted past the S&P 500, which as of Monday’s close was up 6.7 percent from February 5. During that same time, Best Buy shares have increased 13.7 percent, and JCP is up a staggering 61.3 percent and rising. And that’s where the Ratings Model got it wrong: it did not accurately predict the short-term upside of two very volatile stocks.
|Specialty retailers might not have kept pace with the industry, but remain as top picks in the ratings system and are worth considering right now.|
I bring up this instance where in the short term, low-rated stocks outperformed the market as a whole as well as the corresponding industry ETF (in this case, the XRT, which rose 10.7 percent between February 5 through Monday’s close) to make an important point:
Two of the highest-rated stocks I cited in the same column also beat the S&P index and theindustry-select ETF. And all three stocks listed — Footlocker (FL — rated A+, up 12.2 percent from February 5 through Monday), HSN (HSNI — rated A, up 5.4 percent) and Genuine Parts (GPC — rated A-, up 12.6 percent) — remain highly rated, and thus worthy of consideration even after their rises.
The two pans are still ratings pans, despite the short-term, emotional responses to their financial results. J.C. Penney has popped in an irrationally exuberant way, in my view, as there is still an enormous amount of work to do operationally to right that wrong-way ship. BBY has been a more up-and-down stock over the past few years. But its position as a go-to destination for all things electronic is waning without good defense to online competitors.
I think both stocks have merely seen unnatural rebounds in their prices over the past month, and I would still avoid them at this time.
So even after the retail sector has outperformed the general market over the past month, I want to pass along some others in the space that I think are worth further consideration for your portfolios:
Gap Inc. (GPS — rated A-) has so far proven that it can remain ahead of the curve in terms of financial progress even if its merchandising is constantly threatened by fickle fashion trends. It’s a well-run affair that beat the S&P 500 and the XRT over the recent past. While I’d be careful about entry, I think GPS will remain a stock market winner into the longer term (at least one to three years).
TJX Corp. (TJX — Rated A-) has experienced some rough seas in the past, and should be able to manage through them with its core strategy of a low-overhead, high-margin business model well into the future. Consumers can be fickle, but they remain committed to thematic shopping experiences such as that represented by TJX.
Three other high-rated stocks that haven’t kept pace with the industry, but remain as top picks in the ratings system, employ somewhat more specialized business models, as specialty retailers. I think these stocks are worthy of consideration by more intrepid investors right now.
Cabela’s (CAB — rated A), a sporting-goods super store; Williams-Sonoma (WSM — rated A-), a high-end home-goods affair; and Tiffany (TIF — rated A-), the high-end jeweler. Each of these firms faces the threat that consumers will pull back luxury spending, in principle. However, over the year, each has proven adept at keeping foot traffic (and thus, sales opportunities) high. I think they’re all worth considering if you are looking for high-quality retailer exposure.
Watch for opportunities if the jobs report is light this Friday, but I’d say these five — CAB, WSM, TIF, TJX, and GPS — are all buyable today.