US Retail Stocks: Reborn, or Just Zombies?

Stop me if you’ve heard this one: which stock has done better in 2018 – Amazon or Macy’s? How about over the last 12 months?

The answer is Macy’s on both counts:

• M is +59% this year, versus 45% for AMZN.
• Over the last 12 months, M is up 83% while AMZN is 69% higher.

Now, before you start thinking, “Retail is really roaring back”, just look at the returns for the 10 largest US public company retailers excluding Amazon:

• Walmart: -14.4% YTD, +7.1% over the last year
• Kroger: -10.1% YTD, -17.2% in the last year
• Costco: +6.2% YTD, +8.9% in the last year
• Home Depot: +2.1% YTD, +25.5% in the last year
• CVS: +10.2% YTD, -16.5% in the last year
• Walgreens Boots: -13.0% YTD, -22.4% in the last year
• Target: +19.4% YTD, +42.7% in the last year
• Lowes: +6.0% YTD, +25.2% in the last year
• Best Buy: +4.5% YTD, +22.3% in the last year
• TJX: +23.3% YTD, +27.5% in the last year

The average here: 6.3% YTD, and 10.3% over the last year. The 2018 return is better than the S&P 500’s 3.7% advance, to be sure. At the same time, these names as a whole still have some catching up to do; the S&P 500 is 14.1% higher over the last 12 months.

Market trivia aside, the big question is simply what to do with this group. Here’s what we think:

#1) It is hard to believe that any of the companies at the top of the market cap table will see a dramatic shift in investor sentiment given Amazon’s continued efforts in US retail. The home improvement companies are somewhat insulated there, but face the headwinds of higher interest rates.

#2) At the same time there’s clearly market interest in playing a strengthening US consumer. Unemployment is low, equity prices are high, and higher income households are seeing the benefit of lower tax rates on their paycheck. Plus, so many retail names were left for dead over the past few years (Macy’s being a prime example) that there’s potential value in the group.

#3) We don’t do single-stock picking at DataTrek, but for those interested in general exposure take a look at the XRT exchange traded fund. It avoids the market cap trap we mentioned in Point #1 by equal-weighting 85 retail names. Infrequent reweighting means momentum names creep up in importance while laggards slip down a bit.

In the end, we don’t love getting long US retail as a fundamental idea; this is more a momentum trade that should work into the end of the quarter. The whole move over the last few months feels more like a late-cycle dash-for-trash than a reevaluation of bricks versus clicks. Still, for clients looking for a trading idea this is one to consider.