Retail and discretionary stocks are killing it but are they still a buy?

It’s a happy time for select retailers. Home Depot (HD) shares hit an all-time high Tuesday after posting $19.2B in fourth quarter revenue and comp-store sales of 7.9%. Shares of the world’s largest home improvement retailer have gained 11% this year giving investors a bigger payoff than the S&P 500 (^GSPC) which has gained 2.7%.

The returns in Home Depot and other retail-discretionary stocks have pushed valuations to levels some may consider rich.“Valuations are starting to get up there,” cautions Tom Lydon, editor, ETFtrends. The Market Vectors Retail ETF (RTH) carries a price-to-earnings ratio of 22X compared to 17X for the S&P 500. Prompting Lydon to ask, “Is that a little bit of a warning sign?” Walmart (WMT) is the largest holding of the RTH representing nearly 11% of the fund.

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While consumer discretionary stocks have enjoyed the benefit of lower oil prices in recent months, change may be afoot. “Oil prices are starting to creep back up there, we see higher prices at the pump,” says Lydon. According to AAA, gas prices have been rising every day for a nearly a month. The national average is now $2.31 a gallon. If this trend continues, Lydon warns, the willingness of consumers to spend may cool off. “All of sudden maybe that confidence goes away.”

Related: Gas prices on the rise: Here's why

For now, investors are comfortable owning retail and discretionary names. The Consumer Discretionary Select Sector SPDR ETF (XLY) has advanced 5% this year. Along with Home Depot, Disney (DIS), Amazon (AMZN), Starbucks (SBUX) and Lowe’s (LOW) are among the fund’s largest holdings. With a price-to-earnings ratio of 18X it may offer a more reasonable valuation.

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