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Profit from Retail Winners and Losers

By Nick Lanyi on September 12, 2016

Unemployment is low. Wages are rising. Consumer spending is up. Good news for retailers, right?

Not necessarily. Plenty of retailers are getting hammered, and so are their stocks.

Times like these are ripe with opportunity, especially for an analyst who knows how to make money on both winners and losers in an industry. We have one of those at Investing Daily:  Linda McDonough.

Linda is chief investment strategist of Growth Stock Strategist and Profit Catalyst.  She is also a veteran hedge fund analyst who has a knack for uncovering information that others miss, and for making profitable short recommendations.

Recently, she’s booked some astounding wins recommending puts on retail stocks that have plummeted. Her latest was an 80% score on VF Corp. that happened less than three weeks after she made the recommendation.

I talked to Linda on Friday to see what she’s seeing right now in the retail sector, and she also recommended a hot stock from one of her portfolios.

Nick: We’re seeing poor performance among some retail stocks despite some positive economic indicators. What’s going on?

Linda: You’re right. There’s a real dichotomy in the retail sector between strong and weak performers, and it’s driven more by a long-term secular trend than the economic cycle. The secular trend is that Amazon and other online retailers have changed consumer behavior. Folks increasingly are shopping online rather than in malls, and retailers that built their business model around shopping malls are suffering. Foot traffic is bad and getting worse. There simply aren’t enough people in the stores. We’re seeing the impact at Macy’s, which is closing stores. Department stores in particular are in trouble right now.

Don’t most brick-and-mortar retailers offer online sales?

Most have tried, but the Amazon model is extremely difficult to replicate. For example, Amazon has trained customers to expect one- or two-day shipping. They’re not happy waiting two weeks for their package to arrive. Brick-and-mortar retailers complain that free delivery is eating away their online profits.

So who’s doing well?

I like companies that are benefiting from online retailing, such as those that lease airplanes for delivering items bought online. In Growth Stock Strategist, we’ve had success with Supreme Industries (NYSE: STS), which makes equipment for the back of delivery trucks. The stock is up 37% since we recommended it in May, but I think it’s still a buy at its current price.

There are also some positive stories among brick-and-mortar retailers that are bucking the secular trend toward online shopping: furniture stores, for example, which sell items that don’t make sense for consumers to buy online, at least not without seeing them in a store first. I also like some retail stocks as turnaround stories; they’re benefiting from company-specific events that have nothing to do with industry trends.

Investors also can bet against struggling companies by going “short.” You’ve recommended some profitable options trades to bet against retailers that aren’t thriving in the online era. Do you see more opportunity there?

Yes. I’m seeing several opportunities to buy put options on department stores or their suppliers. I make those recommendations in Profit Catalyst Alert only, by the way—it’s my service for investors interested in higher risk–higher reward situations. Right now, for example, a lot of apparel companies rely on customer foot traffic in department stores where their products are displayed. Imagine if one of the prime wholesale customers for your clothing line is Macy’s, which is shutting down stores. Those apparel makers are facing tough headwinds right now, and I’m happy to bet against them.

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