A Shopping List of Retail Stocks

While this sector has already seen a big run-up this year, S&P finds 14 names that hold promise for further gains

By Michael Kaye, CFA

With the holiday season just around the corner and the economic environment improving, retailing stocks may be poised for gains. This week, many retailers reported fairly strong sales and earnings for the latest quarter. Though investors were disappointed with the earnings per share and outlook Wal-Mart (WMT ) reported on Nov. 13, the weakness comes after a strong rally by many retail stocks on hopes for robust sales (see BW Online, 11/3/03, "Where and Why Retail Is Raking It In").

The winning stocks so far this year have been computer and electronics stores, which have jumped 91% through Nov. 7. Catalog retailers have climbed 78%. Internet retailers have shot up nearly 66%, followed by home-improvement chains with a gain of 54%.

Not all retail segments have advanced this much, but they're still handily beating the overall S&P 500-stock index' nearly 20% rise this year. General merchandise stores have gained 37%. Apparel shops have risen nearly 34%, while department stores have climbed 31%.

Which stores may stay in fashion with investors? First, we gathered a list of retailers that have Standard & Poor's highest investment ranking of 4 STARS (accumulate) or 5 STARS (buy). S&P analysts expect these stocks to outperform the overall market over the next 6 to 12 months. Out of that group, we culled the chains that have reported increases in annual sales or revenue in each of the past five years. Our search turned up these 14 names:

Happy Holidays for Retailers?
Company/ticker S&P STARS Ranking
Abercrombie & Fitch (ANF ) 5
AutoZone (AZO ) 4
Bed Bath & Beyond (BBBY ) 4
Electronics Boutique (ELBO ) 4
Foot Locker (FL ) 4
Footstar (FTS ) 4
Gap (GPS ) 4
Group 1 Automotive (GPI ) 5
Hot Topic (HOTT ) 4
Lowe's (LOW ) 4
Pacific Sunwear (PSUN ) 4
Regis (RGS ) 5
Rent-A-Center (RCII ) 4
TJX Cos. (TJX ) 4

Kaye is a portfolio services analyst for Standard & Poor's

Before it's here, it's on the Bloomberg Terminal.