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3 Reasons Why You Should Return Your Retail Stocks

It has been a great 2013 for retail stocks. Too bad it won’t last.

Big box retail stocks Target (NYSE:TGT) and Walmart (NYSE:WMT) are up 15% year-to-date, topping the otherwise impressive 10% returns for the S&P 500 in the same period. Discounters Dollar Tree (NASDAQ:DLTR) and Dollar General (NYSE:DG) are up better than the market, too.

Even dogs Best Buy (NYSE:BBY) and RadioShack (NYSE:RSH) are up big.

But the music could stop for many of these retail plays as consumer spending seems to be on the wane. That means now might be the time to cash out your profits and return some retailers.

Here are the details:

  • We recently learned that retail sales for March fell 0.4%, the second drop in three months. Many experts blamed higher payroll taxes taking a bite out of consumer spending.
  • Furthermore, a separate report suggested consumer sentiment is under pressure. The Thomson Reuters/University of Michigan index of consumer sentiment fell to 72.3 in its preliminary April reading, the lowest since July 2012 and below forecasts.
  • Goldman Sachs recently talked about a “consumption setback” on the horizon after these disappointing numbers. An GS analyst digging into the data wrote that, “The most plausible explanation (for weak consumer data) is that we are seeing a delayed impact from the January payroll tax hike. If this is the right explanation, we could see a couple of quarters of weaker consumption growth in the 1%-2% range, despite the increase in household wealth and the more recent decline in gasoline prices. Combined with the hit from the sequester to federal spending, this would probably make it difficult for real GDP to grow much more than 2%, even if homebuilding and business investment continue to perform well.”

There could be a turnaround in this trend, of course, and perhaps the recent downturn in retail numbers and consumer sentiment is going to be short-lived.

But given these clouds on the horizon, it might be prudent to protect any profits you have in retail stocks now.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.

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