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Shopping for Big Box Stocks

Investors in big-box retailers may be growing as cautious as the shoppers inside the stores.

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The $87 million loss J.C. Penney’s (JCP) reported today was just the latest piece of bad news from big-name retailers this earnings season. Target (TGT), Wal-Mart (WMT), Kohl’s (KSS) and Sears (SHLD) all delivered mixed or negative news in recent days. Experts say that despite a slowly improving economy, big-box retailers are still anything but a safe bet.

One major reason for concern, say analysts: Consumers still refuse to pay full price, creating a very challenging environment for retailers. “You had a lot of signs throughout the holiday season that the consumer didn’t respond well to full-price offerings,” says Brian Sozzi, the chief equities analyst for NBG Productions, a multimedia financial information firm. For example, Abercrombie (ANF) began the holiday season by raising prices, but ultimately had to offer deep discounts to draw in customers, driving down margins, Sozzi says.

Plus, retail stocks have already seen a significant rally: The SPDR S&P Retail ETF (XRT) is up more than 21% in the past year. “This is a really tricky sector historically, but now, when the stocks have had a run like they’ve had, it’s even trickier,” Sozzi says.

Still, some advisers are betting on the retail sector — but selectively. “There’s a lot of really good values there,” says Mark Coffelt, the president of Empiric Advisors. The $37.5 million Empiric Core Equity fund (EMCAX) he manages currently has a 26% weighting to consumer discretionary stocks. That includes auto-parts retailers like Advance Auto Parts (AAP), AutoZone (AZO), and O’Reilly Automotive (ORLY), which are all benefitting from the advancing age of the cars on the road, Coffelt says. He says his fund also owns more narrowly focused retailers like Bed Bath & Beyond (BBBY), Staples (SPLS), and PetSmart (PETM). “I think the broad retailers are in a slug fest, and I don’t know if you want to get in front of that,” but many specialty retailers are attractive now, he says.

Sozzi recommends that investors focus on retailers with strong growth strategies that have offered encouraging guidance for the upcoming year, like Macy’s (M) or T.J. Maxx (TJX), Sozzi says. And, he adds, “I think you have to have a dollar store in your portfolio because of the macro environment.” Sozzi currently likes Dollar Tree (DLTR).

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