Shopping at retail stores can be fun, but is it worthwhile to place your bets on companies in the retail space? Let’s take a closer look at investing in retail stocks.
Shop ’til You Drop
Whether it’s the holiday season or just to relieve the stress of the work week, it’s hard to resist going to the mall or other shopping outlet and partaking in some “retail therapy.” And when we find ourselves standing in long checkout lines, we might wonder if we can capitalize on the massive profits these retail stores make day after day, year after year.
It’s these kinds of musings that impel investors into the world of retail stocks, which can be profitable in some instances but painful in others. The fact is, retail stock investing doesn’t typically offer the instant gratification that we might get from maxing out our credit cards at the local shopping plaza. To put it another way, the fun we might experience in retail shopping doesn’t necessarily translate into a “fun” experience as a retail company investor.
Know Your Company, Know Your Sector
The upshot of this is that we must remain cautious as investors in retail firms, even if we tend to be impulsive as shoppers. Indeed, retail stock investing can be a rocky road for those who lack prudence and don’t do their due diligence.
As with practically any investing strategy, you’ll definitely want to investigate not only the company, but the sector as a whole. In this case, we’re talking about conducting thorough research on both the individual stock and the overall retail sales industry. Remember: a rising tide can lift all boats, but a falling tide can also sink all boats, meaning that the fate of a particular retail company can depend on how the retail sector is doing generally.
Sure, it will require some extra effort to research the latest news and trends in the retail sector, along with the research you’ll have to conduct on your chosen stocks. But trust me, it will be worth the effort in the long run to stay abreast of the industry you’re investing in, as this can have a major impact on your portfolio’s performance over time.
Bumps in the Road
If you’re going to delve into the world of retail sector stocks, you’ll want to know ahead of time that volatility is to be expected, and perhaps even embraced as an opportunity. Consider, for instance, the steep decline that retail stocks took from mid-2015 to early 2016, only to recover much of these losses by the end of 2016. A similar scenario played out when retail stocks fell in the early months of 2018, followed by a quick recovery by the middle of the year.
These pains and gains were felt by practically anyone who took a long position during these roller-coaster market fluctuations. Truth be told, the ups and downs of retail sector stocks can make you seasick if you’re not financially and emotionally prepared.
But then, that’s the nature of investing, isn’t it? The fact that retail stocks are subject to a measure of volatility doesn’t mean that they’re not a worthy bet. It just means that careful stock selection – and at times, a strong stomach – are prerequisites for successful trading in this space.
The 800-pound Gorilla in the Room
No examination of retail sector stocks would be complete without a mention of the behemoth that seems to consume everything in its path; of course, I’m referring to Amazon, the financial freight train that has caused a great deal of stress for investors in traditional retail outlets.
The existence of Amazon is indubitably something to consider when buying retail stocks, but it need not be a deterrent as long as we’re taking reasonable position sizes in solid companies. Retail outlets that have been around for many years and have a strong balance sheet with little or no debt are well positioned to survive the Amazon threat. Besides, it’s not an either/or proposition: it is entirely possible to own shares of Amazon and also take a long position in carefully selected retail companies.
Just Don’t Bet the Farm
Getting back to the original question of whether retail sector stocks are a good bet, I would conclude that it depends on whether we’re willing and able to accept the risks and potential rewards involved in this space. As long as our position sizes are reasonable and we don’t treat investing like a shopping spree, it’s possible to prevent buyers’ remorse when investing in the retail industry.
