When the Going Got Tough, Investors Went Shopping ... in Retail Stocks!

When the going got tough in the markets last week, investors went shopping … in retail stocks! That tells me a profit opportunity could be brewing as we head into the key holiday season.

It’s no secret that retail stocks have gotten hit hard with the “Amazon-ification” of the shopping experience. The online retailer has become a mega giant, e-commerce powerhouse, one that has taken market share from retailers and malls. Many have been forced out of business, or left fighting over a shrinking pool of traditional, bricks-and-mortar-style customers.

But when the market took a tumble recently, guess which stocks outperformed? Retailers! Specifically, the Apparel Retail, Retail REIT, and Drug Retail groups performed the best, despite the fact those industry sub-sectors are in the direct cross hairs of Amazon Inc. (AMZN, Rated “C+”).

Why the outperformance? Better than expected earnings, and hopes for a stronger holiday season. Macy’s (M, Rated “D+”) rallied 11%, while Kohl’s (KSS, Rated “C”) reversed nicely to the upside amid news of shrinking losses and stronger same-store sales. Macy’s added that it expects a strong holiday season, and said it’s keeping prices and earnings guidance intact. That’s important, because the holiday season is the time of year when people spend the most on gifts.

I smell opportunity for investors here. So far this year, out of 153 sub-industry groups that we rate, Retail REITs, Apparel Retail, and Drug Retail rank near the very bottom. They’re down 10%, 6%, and 12% respectively.

But the recent trading action suggests the bottom may be behind us! Just look at this table and you can see that in the last week, those three sub-industries took the top three spots in terms of short-term performance, with gains of more than 4% on average.

To help you uncover the best potential investments in these beaten-down sub-sectors, I created a list of retail stocks that still carry high ratings and that could profit by delivering results that top lowered expectations.

My criteria: The stocks had to be BUY or HOLD Rated (“C-” or better), have market caps of more than $50 million, and have 1-month average trading volume of more than 50,000 shares. You’ll find the complete list below. I suggest you look into buying hidden gems like these. It could help keep your portfolio a little warm and toasty this holiday season.

Best wishes,

Mandeep

Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.