UPDATE: Tax reform and holiday shopping send retail stocks to best month in 6 years
By Ryan Vlastelica
November saw an abrupt turnaround for retail stocks from laggards to leaders
Perhaps pronouncing the death of brick-and-mortar stores was premature.
Retail stocks, which have long lagged the overall market, have seen a strong resurgence in recent weeks, helped by the twin tailwinds of a strong holiday shopping season and optimism that corporate tax rates will be cut as part of a reform package expected to be passed in Washington.
The SPDR S&P Retail ETF (XRT) is up more than 13% over the past month, a significantly stronger performance than the S&P 500 , up 1.5% over the same period. The fund rose nearly 11% over the month of November, which marked its biggest monthly percentage gain since October 2011.
Investors have poured money into the fund, which has seen inflows of $309.4 million over the past month, according to FactSet data. That has brought its assets to $770.3 million, which represents the highest level of assets since February.
Some of the best-performing components are brick-and-mortar stores, which have been among the biggest losers of 2017 as more and more consumers move to internet retail, leading to a sharp increase in the number of store closures (http://www.marketwatch.com/story/retail-store-closures-up-nearly-200-in-2017-2017-09-22).
Macy's Inc. (M) , for example, is up 46% over the past month, although it is still down nearly 29% thus far this year. American Eagle Outfitters Inc. (AEO), supported by stronger-than-expected same-store sales (http://www.marketwatch.com/story/american-eagle-outfitters-shares-rise-after-same-store-sales-beat-expectations-2017-12-06), is up more than 30% over the past month. Gap Inc. (GPS) has also jumped more than 30% over the past month, while Dillard's Inc. (DDS) is up 16%. Electronics retail Best Buy (BBY) is up 11% over the past month, bringing its year-to-date advance to 43%.
Read:Macy's needs to hire 7,000 more employees to keep pace with holiday-shopping traffic (http://www.marketwatch.com/story/macys-surprises-with-news-of-additional-holiday-hires-after-great-start-to-season-2017-12-01)
"I'm a big internet shopper myself, but there's still a tremendous amount of standard brick-and-mortar commerce going on. They're not just going to roll over," said Chris Bertelsen, chief investment officer at Aviance Capital Management. Aviace manages about $2 billion in assets, including stakes in such retailers as Target (TGT) and Wal-Mart Stores (WMT), as well as mall operator Simon Property Group Inc. (SPG).
He added that retail stocks "are cheap, not well liked, and they provide a yield," which made attractive bets, particularly as "they're a major part of the tax story."
The retail sector is expected to be one of the biggest beneficiaries of tax reform, as they pay the highest tax rates of any subsector of the S&P 500 (http://www.marketwatch.com/story/retailers-rally-on-tax-reform-euphoria-2017-12-04). The retail group has an effective tax rate of 35%, according to Credit Suisse, ahead of the telecom sector, at 33.7% and industry services at 32.5%. The tax-reform bill, which was passed by the U.S. Senate over the week, would significantly cut that rate, which would give an immediate boost to profits.
The group has also benefitted from what was by all accounts a strong start to the holiday shopping season, which is expected to show year-over-year growth of 3.6% to 4% (http://www.marketwatch.com/story/black-friday-online-sales-reach-record-5-billion-2017-11-25), according to the National Retail Federation. That would mean total sales of $678.75 billion to $682.0 billion.
Related:Amazon's devices and mobile shopping powered record holiday-weekend retail sales (http://www.marketwatch.com/story/amazons-devices-and-mobile-shopping-powered-record-holiday-weekend-retail-sales-2017-11-28)
In mid-November, the ProShares Decline of the Retail Store ETF (EMTY) was launched. The fund is an inverse ETF, meaning it offers short exposure to an underlying index. In this case, it is designed to rise whenever an index of retail stocks fall (http://www.marketwatch.com/story/new-etf-is-a-bet-on-the-death-of-retail-stores-2017-11-16). Given the strength in retail since the launch, however, the fund has mostly moved lower. It is down 2.9% thus far this week.
-Ryan Vlastelica; 415-439-6400; AskNewswires@dowjones.com
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12-07-17 1449ETCopyright (c) 2017 Dow Jones & Company, Inc.