Buy 4 Retail Funds as a Warm Up to the Black Friday Spree
Last Friday, the markets buoyed up on earnings results from certain retail primes. The Consumer Discretionary Select Sector SPDR ETF (XLY) jumped 1.2% and was the biggest gainer among the S&P 500 components. Apart from positive results, the retail sector also has the upcoming holiday season to draw investor focus.
The positives should boost retailers, translating into gains for the sector's mutual funds as well. So, picking favourably ranked retail mutual funds will be prudent as these promise investors rich rewards this holiday season.
Including releases before the opening bell on Nov 18, 33 of the 43 retailers in the S&P 500 index have reported results. Total earnings for these retailers gained 4.4% year on year on 5.2% higher revenues. Of these companies, 57.6% beat EPS estimates and 42.4% surpassed on revenues. However, there were some robust results that came in afterward, which gave a boost to the growth numbers.
Last Friday, Abercrombie & Fitch Co.'s ( ANF ) stock soared 25% after reporting quarterly adjusted earnings of 48 cents per share, significantly ahead of the Zacks Consensus Estimate of 19 cents. Moreover, earnings increased 14.3% year over year.
Ross Stores Inc. ( ROST ) also reported better-than-anticipated top and bottom lines for the third quarter of fiscal 2015 and retained its outlook for the fourth quarter. Its shares jumped 10%.
Foot Locker, Inc.'s ( FL ) shares gained 5.7% after its adjusted earnings of $1.00 per share came ahead of the Zacks Consensus Estimate of 94 cents, and jumped 20% year over year. Separately, NIKE, Inc. ( NKE ) added 5.5% following its announcement of a new share repurchase program worth $12 billion, along with a hike in its dividend and a two-for-one stock split. Nike jumped to a 52-week high. Also, its weekly gain of 8.9% was the best since the week ended Sep 26, 2014.
In fact, the positive results were not a one-day event as it followed great earnings news from behemoths like Amazon.com ( AMZN ), Home Depot ( HD ), McDonald's ( MCD ), BJ's Restaurants ( BJRI ) and eBay Inc. ( EBAY ).
These retail top performers have historically performed well and their stock prices have been on the rise. Upward estimate revisions based on their positive outlook should also translate into stocks moving up as the holiday season heats up.
Holiday Season to be Positive
Tomorrow is Thanksgiving Day. And after the turkey and prayers, America will loosen its purse strings for the year's busiest shopping day on Black Friday. So we are on the verge of this year's mega shopping spree and thanks to a rebounding economy, a falling unemployment rate and improved consumer sentiment, sales should see a rise.
Several factors indicate that there will be an uptrend in holiday sales this year. According to the National Retail Federation, holiday sales excluding gasoline, restaurants and cars will increase 3.7% on a year-over-year basis.
A yearly increase of 3.7% is substantially higher than the average increase of 2.5% recorded over the last 10 years. Data compiled by eMarketer suggests a 5.7% jump in holiday sales (November and December) to $885.7 billion against 3.2% growth projected earlier. Retail e-commerce holiday season sales are anticipated to increase 13.9%, and represent approximately 9% of total sales this season (or $79.4 billion), up from 8.3% last year.
Moreover, the increase in seasonal hiring by retailers, the slump in fuel prices and record wage growth are all in favor of consumers. These factors are likely to result in a strong holiday shopping season.
A significant improvement in the labor market situation and lower fuel costs have increased disposable incomes. Another major factor encouraging spending this holiday season is the continued slump in fuel prices.
The ability and willingness to spend should lead to jingling cash registers this time. Separately, retailers are efficiently allocating their capital toward a multi-channel growth strategy focused on improving merchandise offerings, and developing IT infrastructure to enhance web and mobile experiences of customers among others.
Retail Mutual Funds in Focus
Below we present 4 mutual funds from the retail sector that should be on investors' radar now. They carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) . Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
Putnam Global Consumer A ( PGCOX ) invests in mid to large companies that are involved in the manufacture, sale or distribution of consumer staples and consumer discretionary products and services. PGCOX uses the "blend" strategy to invest in common stocks of companies.
PGCOX currently carries a Zacks Mutual Fund Rank #1. PGCOX has gained respectively 6% and 7% in the year-to-date and 1-year periods. The 3- and 5-year annualized returns are 14.9% and 11.1%, respectively. Annual expense ratio of 1.26% is however higher than the category average of 1.21%.
Fidelity Advisor Consumer Discretionary A ( FCNAX ) seeks growth of capital. The fund invests mostly in securities issued by firms that are involved in manufacture and distribution of consumer discretionary products and services. The fund uses fundamental analysis and also looks into economic and market conditions for investment decisions.
FCNAX currently carries a Zacks Mutual Fund Rank #1. The fund has gained 7% and 11.3% respectively over year-to-date and 1-year periods. The 3- and 5-year annualized returns are 18.6% and 15.1%, respectively. Annual expense ratio of 1.14% is lower than the category average of 1.41%.
Rydex Retailing A ( RYRTX ) invests most of its assets in retailers that are traded in the US and also in derivatives. RYRTX invests significantly in small to mid-sized retail companies.
RYRTX currently carries a Zacks Mutual Fund Rank #2. RYRTX has lost 0.1% year to date, but is up 3.5% over the last 1-year period. The 3- and 5-year annualized returns are 14.2% and 14%, respectively. Annual expense ratio of 1.58% is however higher than the category average of 1.41%.
Fidelity Select Retailing Portfolio ( FSRPX ) seeks growth of capital. FSRPX invests a large chunk of its assets in securities of retailing companies that are traded within the domestic boundary. These firms are involved in merchandising finished goods and services to consumers.
FSRPX currently carries a Zacks Mutual Fund Rank #1. FSRPX has gained respectively 20.3% and 26.4% in the year-to-date and 1-year periods. The 3- and 5-year annualized returns are 25.1% and 21.3%, respectively. Annual expense ratio of 0.81% is higher than the category average of 1.41%.
About Zacks Mutual Fund Rank
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