Retail Stocks: “A Really Nice Contrarian Play” Says Strategist

Just in time for the holiday season, signs of softness showed up in the October retail same-store sales data —sales at stores opened less than one year. Overall sales increased a weaker-than-expected 3.7% from a year ago. Luxury retailers were hit the hardest, posting a combined year-over-year drop of 5.9%. Companies like Saks (SKS) and Nordstrom (JWN), as well as big box chains Costco (COST) and Target (TGT) are among the major retailers that fell short of analyst estimates.

Regardless, the overall sector is outperforming the broader market and technical strategists like Ryan Detrick of Schaeffer's Investment Research point to charts like the SPDR Retail etf (XRT), which is up 10% year-to-date, to support his bullish take.

"It's a really nice contrarian play," Detrick says in the attached video. "It's quietly one of the strongest sectors, yet again we continue to hear about all these troubles in the overall economy and U.S. consumer."

He's not denying there are economic headwinds and even points out the weakness in the latest polls that gauge consumer spending sentiment. The National Retail Federation predicts holiday sales will rise 2.8% to $466 billion this year versus a 5.2% increase in 2010. And the latest Gallup poll taken last week shows that Americans plan to spend a total of $712 on gifts this holiday season versus $715 estimated last year at the same time. The softness in sentiment is exactly why Detrick is going full steam ahead into the retail sector.

"We want to see that negativity or at least lowered expectations heading into the Christmas season, because with lower expectations you can have that upside surprise," says Detrick. "We think people will still be spending money; they say one thing, but go and do another."

From November through December retailers can make up to 40% of their annual revenue. It's a critical time period, so headwinds like the 9.1% unemployment rate, a housing depression, sustained high gas prices, and general uncertainty about the recovery are not to be taken lightly. "Nonetheless, price action is what really matters," says Detrick.

He's looking for retail stocks that have increasing earnings, strong price action, and he pays attention to analyst ratings. This leads to some of his favorite stocks in the sector: Chipotle (CMG), Costco (COST), McDonald's (MCD), Hansen Natural (HANS), Amazon.com (AMZN).

"When you have a sector that is quietly leading, people continue to hammer down on reasons not to like it, that's a sector that we're gonna take note of, and be long," he explains.

And if you're not willing to take a chance on individual retail stocks, Detrick recommends the SPDR Retail etf (XRT). He say it's the "easiest, cheapest, most efficient way" to get into retail.