Diversification vs. Stock Picking in the Retail Sector
The retail sector, as reflected by the SPDR S&P Retail ETF (XRT), experienced a surge in November, reaching a new high. However, this momentum faltered in December, failing to surpass the November peak and subsequently retreating towards its 50-day moving average. This performance raises questions about the overall expectations for the retail sector, particularly in light of upcoming holiday sales figures. While diversification through ETFs is a valuable investment strategy, identifying individual stocks with superior potential can lead to higher returns. This analysis examines four retail stocks that have demonstrably outperformed the XRT ETF, showcasing the potential rewards of discerning stock selection.
Build-A-Bear Workshop (BBW): A Standout Performer
Build-A-Bear Workshop (BBW) epitomizes outperformance in the retail sector. Unlike the XRT ETF, BBW continued its upward trajectory in December, effortlessly achieving new highs and avoiding significant pullbacks towards its 50-day moving average. This stark contrast highlights the potential for individual stocks to defy broader sector trends. Despite its relatively low trading volume, averaging 266,000 shares daily, and a market capitalization of $610 million, BBW has exhibited resilience and growth. Its inclusion in the Russell 2000 index signifies its position among small-cap companies. However, a relatively high short float of 10.03% suggests a degree of skepticism among some investors.
Dillard’s (DDS): A Bullish Breakout
Dillard’s (DDS) displayed a classic bullish signal in mid-December, with its 50-day moving average crossing above its 200-day moving average. This technical indicator, often interpreted as a sign of positive momentum, preceded a breakout above the July high, triggering a surge in buying activity. With a market capitalization of $7.26 billion, DDS is significantly larger than BBW. However, like BBW, DDS experiences relatively light trading, with an average daily volume of 144,000 shares. A high short float of 14% suggests that a portion of the recent price surge may be attributed to short covering, where investors who bet against the stock are forced to buy shares to close their positions, further driving up the price.
Tapestry (TPR): Luxury Goods Leading the Way
Tapestry (TPR), a luxury goods company housing brands like Coach, Kate Spade New York, and Stuart Weitzman, has demonstrated consistent growth, surpassing its late November high in late December. The stock’s bullish trajectory was foreshadowed by the 50-day moving average crossing above the 200-day moving average in early October. This positive momentum has propelled TPR to nearly double in price from its August low to its recent high. With a market capitalization of $15.28 billion, TPR represents a more established presence within the retail sector. Furthermore, its 2.14% dividend yield offers an additional income stream for investors.
Urban Outfitters (URBN): Defying Resistance
Urban Outfitters (URBN) decisively broke through previous price resistance at $49 in late November, propelling its stock price to new highs throughout December. This upward momentum contrasts sharply with the wavering performance of the retail ETF. The bullish trend was further reinforced by the 50-day moving average crossing above the 200-day moving average mid-month. Similar to DDS, URBN’s 10.43% short float suggests that short covering may have contributed to the price surge. As a retail apparel company with a market capitalization of $5.16 billion, URBN holds a prominent position in the industry and is included in the Russell 2000 index. Its brand portfolio includes Anthropologie, Menus and Venues, and its namesake Urban Outfitters brand.
Investing Insights: Beyond the ETF
These four retail stocks—BBW, DDS, TPR, and URBN—demonstrate the potential for individual stock selection to outperform broader market indices or sector-specific ETFs. While diversification remains a crucial investment principle, active stock picking, based on fundamental and technical analysis, can yield significant rewards. Factors such as moving average crossovers, breakout patterns, short float levels, and company-specific news can provide valuable insights for identifying potential winners.
Market Dynamics and Investor Sentiment
The divergent performance between the XRT ETF and these individual stocks underscores the dynamic nature of the retail sector. While the ETF’s performance reflects the overall market sentiment towards retail, individual companies are subject to their own unique drivers of growth and profitability. Factors such as brand strength, consumer preferences, inventory management, and online presence can significantly influence a company’s performance, independent of broader sector trends. The importance of understanding these individual company dynamics becomes crucial when seeking outperforming investments. The cases of DDS and URBN, where short covering likely contributed to price appreciation, illustrate how market dynamics and investor sentiment can impact stock prices, creating opportunities for astute investors.
