Retail Stocks Are on Sale

The loss of 2.6 million jobs and declining home and retirement fund values have squeezed consumer spending. Retail sales dropped for the sixth consecutive month as consumers cut spending to save for the future, according to the U.S. Commerce Department. The decline is the longest since comparable records began in 1992 and there is still no end in sight as the economy continues to deteriorate.

Retailers have been struggling with this lower spending after one of the worst holiday seasons in history. Sales are down sharply as consumers shied away from stores while margins were pressured by steep discounts offered across the board. Unfortunately, these measures were necessary to get rid of large inventories built up when the economy was on track six months ago.

These losses may begin to curtail as pricing stabilizes and inventories are emptied. Shoppers accustomed to bargain prices now may find those gone within a month or two as retailers scale back and revamp their pricing to meet with market demand. This action should help stabilize margins, reduce losses, and create the grounds for a recovery in the troubled sector.

While consumers may be hard pressed to find deals at stores, investors will then have plenty of bargains to choose from among retail stocks. Earnings multiples are already near record lows for many stores while some have fundamental prospects that are enviable for any public company. And with inventory gone and pricing restored, they might just be stable enough to buy.

Some retailers like Wal-Mart [[WMT]] saw their first quarterly declines, but may end up being the strongest players going forward. Others like Target [[TGT]] are sitting on strong assets that hold substantial value when the market recovers. Finally, those clothing retailers that have seen discretionary spending disappear may begin to move upwards from their depressed levels.

Investors looking to get involved with these trends early on without putting a lot of capital at risk may want to consider using long-term options called LEAPS. These options give investors the right, but not obligation, to purchase shares anytime over the next one or two years at a fraction of the cost of buying the stock outright. This equates to reduced risk and increased leverage.

See “What are LEAPS Options?” for an introduction to these securities or check out “Using LEAPS as a Stock Substitute” for more information on this strategy.

 Email This Story
Join LEAPSInvestor.com