Yahoo Finance What Are Retail Indicators Telling Us about the Economy?
What Investors Need to Know about Valuing Retail Companies
Investing in retail
Retail, which is at the heart of any consumer-driven economy like the United States, ranges from small regionally targeted stores to large conglomerates like Walmart (WMT) and Sears (SHLD). Retail has had a high correlation with economic indicators like GDP and personal consumption. For example, on a TTM (trailing 12 months) basis, the SPDR S&P Retail ETF (XRT) has had a high positive correlation of 0.94 with both GDP and the personal consumption index of the United States. The graph below depicts this relation between the retail sector and the market as a whole.
Retail stocks typically have a substantial weight in any investor’s portfolio, index, or ETF. Historically, large-cap retail stocks are known to have lower beta than other sectors in the market and thus act as defensive stocks. For example, Walmart, Tiffany and Co. (TIF), and Macy’s (M) have five-year betas of 0.98, 1.02, and 1.01, respectively.
The negative correlation of retail stocks with major commodities like crude oil and cotton have also played a part in increasing the attractiveness of the retail sector to investors. The S&P 500 Broad Market Index (SPX) has a substantial 12.8% in the consumer discretionary sector, whereas the Vanguard Russell 1000 ETF (VONE) has an allocation of 14.4% in the sector.
Apart from its diversifying nature, retail stocks have also provided substantial returns to investors on a standalone basis. The SPDR S&P Retail ETF (XRT) has outperformed the broad market index and has given YTD returns of 1.88%, whereas stocks like Dollar General (DG) and Dollar Tree (DLTR) have provided strong YTD returns of 12.53% and 17.07%, respectively.
The importance of retail as an investment opportunity makes it all the more important to value the stocks using the right methodologies in order to get a sense of the correct intrinsic value of the stock.
In the next article, we’ll look at how Wall Street values different types of retail stocks.
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