Zacks Investment Ideas Feature Highlights: SPDR Retail Index, Consumer Discretionary Select Sector SPDR, Retail HOLDRS, Coach and Tiffany

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Jul 19, 2011, 09:30 ET

CHICAGO, July 19, 2011 /PRNewswire/ -- Today, Zacks Investment Ideas feature highlights Features: SPDR Retail Index (NYSE: XRT), Consumer Discretionary Select Sector SPDR (NYSE: XLY), Retail HOLDRS (NYSE: RTH), Coach (NYSE: COH) and Tiffany & Co. (NYSE: TIF).

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CONSUMER IS ALIVE AND KICKING

Since the August 2010 lows, consumer stocks have participated in the broad market rally as well, if not exceedingly better, than any sector. Let's look at the ETFs representing consumer discretionary/retail spending for the performance numbers since last summer's lows:

SPDR Retail Index (NYSE: XRT) went from $36 to $56, a 55.5% surge

Consumer Discretionary Select Sector SPDR (NYSE: XLY) went from $29 to $41, a 41% gain*

Retail HOLDRS (NYSE: RTH) went from $85 to $115, a 35% return

Why ETF Investing Works, If You Don't Want To

The numbers above make a great argument for one of my strongest beliefs about investing. For conservative long-term capital, balanced allocation and cyclical rotation among sector ETFs is a no-brainer when you don't know what to do with your money.

In March of 2009, when I first went on national television as a market analyst and had a chance to speak to millions of investors in a given week, I took the opportunity during that historic, once-in-a-generation, "everything must go" market to essentially tell investors, "If you can't pick stocks right now, at least put long-term money into vital economic sectors that will certainly be much higher five years from now like Energy, Technology, and Biotech." The 50% to 80% gains in those sector ETFs speak for themselves of the simple power of this investing approach.

Of course, I ignored Consumer Discretionary and Retail sectors in 2009 (I can't get everything right). Thank common sense, and simple observation, that I stopped that foolishness in 2010.

Before we get to specific stocks in these sectors, allow me to break down some of the major differences between these "big 3" retail ETFs. The XLY includes industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing.

The index includes McDonald's, Walt Disney, Comcast, Home Depot, Ford, and Target in the top ten. But its top fifteen percentage performers for the past 52-weeks -- with fantastic gains from 58% to 141% -- are a "who's who" of the top retailers of entertainment, hip apparel, luxury items, travel, and cars, including, in order of said performance, priceline.com, Netflix, Chipotle, Abercrombie & Fitch, Tiffany, AutoNation, CBS, Wynn Resorts, Coach, Polo Ralph Lauren, Amazon.com, CarMax, Macy's, Limited Brands, and Bed Bath & Beyond.

Most of these big winners were found early in their advance in the past two years by a particular stock-picking system which has generated 28% annual returns since 1988. I'll share that system and fourteen of its current #1 consumer/retail picks -- for no charge -- in a few minutes.

Luxury Predator on the Mag Mile

I also did a little anecdotal research to find out why the stocks of luxury retailers like Coach (NYSE: COH) and Tiffany & Co. (NYSE: TIF) should have done so much better than those of Walmart or Target when it seemed to me in 2009 that the easy "pairs trade" was to short Fifth Avenue and buy Main Street, based on a retrenching consumer.

My expert in the field -- a 30-something female shopaholic who stalks Michigan Avenue and the Chicago suburban malls like a ruthless predator of the finer things -- told me that Coach and Tiffany did something unprecedented in the past couple of years. They "brought down the shelves" to Main Street, she said, by offering new luxury products at lower price points.

This meant she could buy a $400 Coach bag and feel just as classy as the woman with the much more expensive Louis Vuitton bag. And Tiffany made life easier for your average husband or boyfriend by creating signature bracelets under $200.

XRT vs. RTH

The other two consumer/retail ETFs are good to compare and contrast to understand different ways they offer investment exposure in the space. The Retail Holders (RTH) is a fund with only 18 stocks evenly balanced between consumer cyclicals (discretionary) and non-cyclicals (staples).

RTH is thus considered more diversified than XRT which is weighted 80% toward discretionary names. Wealth manager Gary Gordon, President of Pacific Park Financial calls the RTH the best "offense-defense" play because of this balance. He looks at RTH as being a combo XLY and Consumer Staples (XLP) choice and highlights the benefits you gain through stable dividend income.

Ringing the Register with Consumer/Retail Earnings Machines

But if you are serious about really beating the market, especially as the broad indexes look destined to trade sideways in the third quarter just as they did in the second, then you have to be a stock picker. And if you are going to pick your own stocks -- and you want to find those 50% to 150% winners noted above -- you have to have a system with robust screens that alerts you to earnings momentum when it is beginning.

Why is this so important? Because earnings momentum is the single most powerful factor affecting stock prices. And this momentum is best predicted by upward revisions to analyst earnings estimates.

What makes this work for stock prices is this fact: institutional buying of stocks tends to be preceded by upward earnings estimate revisions. You want to be in front of the big portfolio managers and it's easy to do if you have a screen that alerts you early to upward shifts in earnings estimates and likely actual momentum.

While the big elephants of the market take their time lumbering in to new earnings movers following upward estimate revisions, you have time to get in ahead of them. Trading this way, in 1-3 month windows around every earnings season, has been proven highly successful by a system with 28% annual returns for the past two decades.

The Zacks Rank stock rating system is built on just such a robust fundamental earnings screen. Here are 14 top consumer/retail stocks currently with a #1 Rank (strong buy) from that system:

Bed Bath & Beyond (BBBY), Cost Plus (CPWM), Crocs (CROX), Foot Locker (FL), Green Mountain Coffee Roasters (GMCR), Hansen Natural (HANS), Lululemon Athletica (LULU), Macy's (M), Rue21 (RUE), Saks (SKS), Starwood Hotels & Resorts (HOT), Steve Madden (SHOO), Tiffany & Co. (TIF), and VF Corp (VFC).

Michigan Sentiment Drops a Bomb in the Mall

Need another reason to be very selective in your stock-picking and to focus on the earnings machines? Friday's consumer sentiment number from The Thomson Reuters/University of Michigan survey fell to a two-year low of 63.8 in July from 71.5 the prior month. The consensus expectation was for something a little closer to 72. Ouch! Rick Santelli, live on CNBC from the CME trading floor (my old haunt), was beside himself after this number. The man is rarely shocked by much.

So the question is, "Will investors and consumers be shocked and go into a spending freeze?" Hard to know. What you can know is where to find the strongest stocks to put your money by following the clear trail of earnings momentum. Charge on, American consumer, charge on.

Disclosure: The author had no positions at time of publication in any stocks mentioned.

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