by Michael Tarsala
Retail sales rose a better-than-expected 0.8% gain in July, the first increase in four months, raising hopes that the largest segment of the U.S. economy is not dormant.
Even more surprising, purchases climbed in all three categories tracked in the Commerce Department survey, the first time that has happened since 2005.
“Everyday people in the U.S. are not focused on the European financial crisis,” said Mark Holder, manager of the Net Payout Yields investment model at Covestor. “I think the overall U.S. economic numbers are going to begin coming in better than expectations.”
Holder’s top holding is Gap (GPS), which reported a 10% increase in July same-store sales, surging past analyst expectations. The company expects its second-quarter earnings to rise from the prior year. Holder has held the stock since late last year, and says he will continue to own it, provided Gap continues to buy back stock.
Gap is not the only retailer to recently post strong results. Though not currently held, retailer TJX Cos. (TJX), owner of the T.J. Maxx, HomeGoods and Marshalls chains, reported a 21% second-quarter earnings rise, stronger same-store sales, and raised its full-year earnings estimate.
Home Depot (HD) also rose on better-than-expected earnings, seeing improvements in California and Florida, two states hit hard by the housing market crash.
Still, a single economic data point does not mean that the U.S. economy gets a clean bill of health, says C.J. Brott, who runs the Macro Plus Income investment model, geared toward individuals that seek to retire in five years.
“I was surprised by the retail number, and I am glad that people are feeling a bit more confident,” Brott said. “I was even more impressed with the news that consumers are willing to take on a little more credit card debt. But it doesn’t change my opinion on where the economy is headed. I would have to see two or three months of positive surprises before I would say there is a change in the negative trend.”
Brott says that he is not an active investor in retail, citing a strong rally and high multiples in many of the group’s large-cap names.
The one sector with strong economic ties that he still likes is machinery, including Joy Global (JOY) and Caterpillar (CAT), both of which he considers long-term investments. He purchased both stocks for the Macro Plus Income model early this month.
“There is a consistent need for food and energy, and that is not nearly as cyclical as the need for iPads (AAPL) or the newest trend in clothing.”
Mike Simon, manager of the Large Cap Growth investment model, suggests the strong retail sales beat partly is a reflection of expectations being pushed down too low. His top holding is discount retailer Ross Stores (ROST).
Simon says that the economic numbers have yet to meaningfully strengthen broadly, although he is not banking on a new recession at this point.
“Europe is holding the economy down, but not enough to cause a new recession.”
