By Paul R. La Monica

There is considerable angst about the American consumer. Retail sales for February were a bit weaker than expected. Inflation pressures, while subsiding a bit recently, remain stubbornly higher than many would like. Tariffs may make the problem worse.

So it should come as no surprise retail stocks are off to a tough start this year, but there are now compelling bargains in the sector.

The Consumer Discretionary Select Sector SPDR exchange-traded fund is down 12% in 2025, compared with a 3% drop for the S&P 500. Investors may be pricing in a more severe downturn, even a recession, than what may actually materialize.

Giuseppe Sette, co-founder and president of Reflexivity, an analytics research firm, said in a recent report that in prior mild downturns, consumer discretionary stocks actually performed better than more defensive-oriented sectors such as healthcare, utilities, and real estate.

Why? Consumer discretionary stocks "likely priced in the recession ahead of time," Sette said, adding investors "might want to buy the oversold stocks that have already discounted the slowdown" to get ahead of any potential economic softness later this year.

He noted that in past downturns, stocks such as Gap, Dollar Tree, Lowe's, and Monster Beverage fared better, as did Penn Entertainment, Booking Holdings, and Ford.

Investors should also not underestimate the willingness of the U.S. shopper to keep hitting the mall to find bargains.

Yes, many malls (particularly older ones in urban areas) have been shutting down in recent years. But Cole Smead, chief executive officer and portfolio manager with Smead Capital, thinks companies that own so-called Class A malls in suburban areas catering to higher income consumers and tourists should do fine even in a downturn. His firm owns Simon Property Group and Macerich.

Smead said middle class and wealthy consumers continue to spend and while credit card usage may be rising, data from the Federal Reserve show household debt levels and related interest costs remain relatively low.

"Consumers are nowhere nearly as overleveraged as they've been in the past," Smead told Barron's. "The most foolish bet investors are trying to make is thinking that the consumer is in trouble. That's a consistently stupid bet."

With that in mind, Smead also owns cosmetics retailing giant Ulta Beauty, which recently reported better-than-expected earnings.

Consumers are also likely to keep flocking to retailers that offer decent discounts, whether online or in physical stores. That trend could accelerate if the economy starts to lose a little more momentum.

Stephanie Link, chief investment strategist and portfolio manager with Hightower, said in an email she recently bought Amazon and Target after their stocks were hit by tariff-related turmoil.

Link said Amazon should benefit from the fact that it remains, by far, the leader in digital commerce.

"In terms of retail, the big are getting bigger," she said, adding that the company has been gaining market share.

As for Target, Link believes the retailer, which has struggled lately, is starting to show hints of improvement. She cited better traffic trends as of late as well as slightly better sales of discretionary goods in its most recent quarter. That could help get the stock back on track.

"Retail isn't an easy environment right now, but Target seems to be doing all the right things," Link said.

Despite that, investors continue to shun the stock. Shares of Target are down more than 20% this year and now trade for less than 12 times earnings forecasts. That is well below its five-year average price-to-earnings ratio of about 19.

In fact, the entire retail sector is looking like a relative bargain. The consumer discretionary SPDR ETF is trading at about 22 times earnings forecasts, well below its average multiple of 31.

Discretionary stocks have tended to trade at a healthy premium to the overall market, but their valuation is currently on par with the S&P 500. So it might be time for investors to load up the shopping cart for retail stocks on sale.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 17, 2025 15:37 ET (19:37 GMT)

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