Zacks Industry Rank Analysis Highlights: Saks, CVS, Tiffany’s, O’Reilly and Advance Auto.

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Oct 27, 2011, 09:30 ET

CHICAGO, Oct. 27, 2011 /PRNewswire/ -- Stocks featured in this week's Zacks Industry Rank analysis include Saks (NYSE: SKS), CVS (NYSE: CVS), Tiffany's (NYSE: TIF), O'Reilly (Nasdaq: ORLY) and Advance Auto (NYSE: AAP).

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Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist, Zacks.com.

Retail Roars

There are six different retail "industries" clustered in the top 15. Some of them are on the small side, with two of them having just four members, but they are still larger (by number of firms) than five other members of the top 15.

One, the Miscellaneous/Diversified Retailers, is actually far larger than average, with 29 firms in it. Not surprisingly it is the "weakest" of the six coming in a three way tie for 14th place, but given the size of the group perhaps it has the most impressive showing. Its average Zacks Rank is 2.38, unchanged from last week.

The Drug Store Industry is the next biggest, with 11 members, and also the next furthest down the list coming in 13th place, but that is an improvement of 13 spots from last week. Its average Zacks Rank fell to 2.36 from 2.55 last week.

The two "industries" with four members are in a tie for eighth place, both slipping one spot on the week with unchanged average ranks of 2.25. Despite the similarities in rank, they are very different types of stores: Jewelry and Convenience.

Doing slightly better are the Regional Department Stores, a five-member industry in seventh place on an unchanged average Zacks Rank of 2.20. Best of all is the Auto Parts stores, in a six way tie for first place (an improvement of 8 spots) with an average rank of 2.00. With six members it is a slightly below-average-sized industry.

If the Zacks Ranks were distributed randomly, one would expect that only 5% of the members of these "industries" would earn the coveted Zacks #1 Rank (Strong Buy). Instead, 14 of the total of 39 (35.9%) have earned that distinction. If it were random, only 15% would hold Zacks #2 Ranks (Buy) but actually 16, or 41.0%, hold it.

In terms of target shoppers, the firms range from those that cater to the very wealthy, such as the high-end department store chain Saks (NYSE: SKS) to those that cater to a decidedly less affluent clientele such as drug store giant CVS (NYSE: CVS).

While CVS is the only mega-cap firm on either table, there are four other firms that top $10 billion in market capitalization. Most, however, are mid- to small-cap firms and even two sub-$100 million micro caps to chose from. The valuations are, for the most part what I would call reasonable -- not compelling, but not at scary nose-bleed levels either.

A Couple Caveats

There are a few that I would be cautious about on a valuation basis, particularly on this year's earnings. Also, while things are going well now -- or at least much better than people had been anticipating (and the Zacks Rank is driven by the change in expectations and earnings surprises) -- I do remain worried about consumer spending in 2012.

Unless Congress does something, the payroll tax cut that has been in effect for this year will expire on January 1st. For someone earning $50,000, that means $1,000 less in take-home pay, and that will probably result in a lot less discretionary spending. That will be a very big issue for the Retailers that either mostly cater to the middle to lower class customer, or which sell very discretionary items.

Since the tax increase will max out at $2,134 (2% of the $106,700 limit on payroll tax collections) that will be much less of an issue for a firm like Tiffany's (NYSE: TIF). One should, however, not make the mistake of thinking that a weak economy is bad for all retailers. For example, if people are not confident enough to buy a new car, it means they will be keeping their old jalopy on the road longer. That can only be good news for the auto parts Stores like O'Reilly (Nasdaq: ORLY) and Advance Auto (NYSE: AAP).

The Zacks Rank is, however, better used as a short term timing/trading tool, not as a guide towards long-term investing. Its maximum impact comes in less than three months. Thus even if you agree that there will be substantial headwinds for the consumer next year, there may still be a good trade or two to be made.

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Contact: Dirk Van Dijk, CFA
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