Our Top Retail Picks for Holiday Shopping

R.J. Hottovy: With holiday shopping right around the corner, it's time to take make some predictions for the retail sector. While we don't anticipate the strong 5% growth that we saw last year--using National Retail Federation statistics--we believe that most indicators point to a strong holiday selling period, with final results likely to come in ahead of the 4% average growth we've seen the past five years.

Sales this year should be driven by high consumer confidence, a stable job market, improved wages, a relatively benign inflationary environment, and several notable product cycles such as connected home. Stock market volatility is the one notable risk to these projections, as the higher end consumer that has been the driving force of consumption in the U.S. tends to take its spending cues from the health of equity and housing markets. However, this group has been able to withstand market corrections of more than 10% three times since the Great Recession, and we believe that these consumers will continue to spend this holiday season.

With respect to top performing product categories, we expect consumer electronics will be a key category as smart home adoption continues to accelerate, and many vendors unveil a number of new ancillary products across categories with accessible price points just in time for the holiday season. We also believe off-price retailers like TJX and Ross Stores will continue to do well, as well as luxury retailers, assuming stock market volatility is kept in check.

In terms of our top picks, we like Amazon, with a fair value of $2,200 per share. The stock has sold off since its third-quarter earnings update but still presents an attractive growth and increasingly visible profitability story through Prime member engagement, third-party sales, advertising, and AWS.

We also like toy manufacturer Mattel, which we have a fair value estimate of $21 per share. The company has been hindered by the bankruptcy and liquidation of Toys 'R' Us but should start to see a more pronounced turnaround through core brand focus and manufacturing changes in the year to come.