Favorite Retail Stocks

By Matthew McCall | June 08, 2012 AAA

With U.S. consumer spending continuing to post gains, which retail stocks will be the big winners if the trend continues? In April, spending by U.S. consumers increased by 0.3%, according to the Commerce Department. In March, the increase was 0.2%. Not only is the increase in consumer spending important to retailers, but also to the overall economy, because it makes up approximately 70% of the country's GDP.

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Four stocks that look to take advantage of different types of consumers could be positioned to continue outperforming their peers. The key will be if the consumer continues to spend; based on the numbers the trend should continue.

Coffee
Dunkin' Brands Group
(Nasdaq:DNKN) is the owner and operator of Dunkin Donuts and Baskin-Robbins brands worldwide. Most Americans find it hard to resist a latte with a powdered note in the morning and an ice cream in the evening. The company, which went public last July, is close to a new all-time high as the outlook for lower coffee prices will help the bottom line. The PEG ratio of 1.56 is roughly in-line with Starbucks' (Nasdaq:SBUX) 1.48 PEG Ratio, but the one difference is that DNKN will cater to slightly lower price-point consumer, as their coffees are not as expensive as SBUX. The stock also pays a 1.9% dividend. I like the stock near the $30 support level.

Home Improvement
After your morning coffee fix it is time to improve on the home that will not be up for sale anytime soon, because the housing market is still now where it should be. One destination for all things home improvement is Lowe's Companies (NYSE:LOW). After hitting a multi-year high in May, the stock has fallen about 14% and is now a value play again. The PEG ratio of around 0.94 and dividend yield of 2.4% makes the stock attractive. If you agree with my fix up the home versus sell the home synopsis, LOW should be a big winner.

SEE: Analyzing Retail Stocks

Apparel and Everything Else
When it is time to load up on new clothes at discount prices the next stop is Ross Stores (Nasdaq:ROST). Apparently there are a lot of people taking advantage of the discounts; the stock has been a top performer for the last few years. Since the end of 2006 ROST is up about 335% and is trading near an all-time high. With a PEG ratio of 1.40 the stock has room to run, but should be bought on weakness.

Finally, for anything else that may be needed throughout the day, there is Target Corp (NYSE:TGT). The general merchandise store offers everything from food, to movies, to personal products. The stock has been floating around an all-time high and appears ready to breakout in the near future. A PEG ratio of 1.19 along with the bullish chart makes the stock attractive and the 2.1% dividend yield is a bonus.

SEE: The 4 R's Of Investing In Retail

The Bottom Line
All four stock ideas are obviously a bet on the consumer. However, each stock goes at it in a different manner and they could trade independently of each other, based on their niche retail sectors. The key to investing in the retail sector is to diversify with several retailers that cover various niches within the sector. The four above are a good start.

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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

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