Why David Einhorn Is Scooping up Retail Stocks

Investor David Einhorn has gathered up a bundle of retail stocks, reflecting many investors' move out of high-valuation sectors into cheaper ones. Einhorn's Greenlight Capital sold tech stocks in Q2 in favor of retail stocks, such as Gap Inc. (GPS), Best Buy Co. (BBY), Dollar General Corp. (DG), Dollar Tree Inc. (DLTR) and The TJX Companies (TJX), according to a recent filing and as reported by Barron's.

Greenlight appears to be betting on the resilient American consumer after a period of underperformance, in which its flagship fund has lost 18% over the year through July. Other major investors also look to be shifting their focus to retail. (For more, see also: Retail Stocks Hit New Highs.)

Einhorn's 5 Retail Picks

Company Price to Earnings Ratio
Gap 13.5
Best Buy 17.5
Dollar General 21.5
Dollar Tree 20.2
The TJX Companies 23.5
S&P 500 24.4

Strong Job Market and Consumer Confidence to Boost Spending

"We definitely prefer consumer discretionary over tech. I think the bottom line is that lower unemployment means you've got more consumers who have the ability to spend. I know wage growth is only growing modestly at 2.7% year over year, but we want to buy assets when there's the potential for a catalyst," stated Mark Tepper, president and CEO of Strategic Wealth Partners, as cited by CNBC.

On Monday, the National Retail Federation lifted its forecast for retail sales to grow 4.5% over 2017, excluding automobiles, gas stations and restaurants, compared to its earlier forecast of between 3.8% and 4.4%. 

“Higher wages, gains in disposable income, a strong job market and record-high household net worth have all set the stage for very robust growth in the nation’s consumer-driven economy,” NRF President and CEO Matthew Shay said in a statement, as cited by Barron's. 

Greenlight's strategy has focused on retail brands tailored to lower income consumers, as the hedge fund sold shares in higher fashion players like Tapestry (TPR) and Urban Outfitters (URBN). While low employment has failed to translate to wage growth, Barron's noted that Americans still recovering from losses from the recession could boost sales at discount retailers. 

Consumer sentiment also looks solid despite fears over rising rates and inflation, noted Barron's. The University of Michigan's consumer sentiment index hit 97.9 in July, compared to the historic average of 86.35 from 1952 through 2018. 

The Consumer Discretionary Select Sector SPDR Fund (XLY) exchange-traded fund (ETF) has recently outperformed the tech-tracking Technology Select Sector SPDR Fund (XLK) ETF as some market watchers warn on tech's vulnerability to inflated multiples, privacy concerns, international trade tensions and weaker-than-expected earnings. 

One-Year Performance

XRT 22.4%
XLY 23.3%
S&P 500 14%

Meanwhile, trading volume in the the $633 million SPDR S&P Retail ETF (XRT) yesterday was more than twice the average daily turnover for the past year. 

Some retail bears remain wary on the rising dominance of Amazon.com Inc. (AMZN), fearing that the tech behemoth will continue to steal share from traditional players and wreak havoc on the retail and consumer spaces. (For more, see also: Amazon to Be #1 in Apparel in 2018: Morgan Stanley.)

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