Retailers on the Rise

Industry Rank Analysis 2-10-10

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks Rank #1 and #2 stocks than #4 or #5-ranked stocks) and some improvement in the relative position from the prior week.

It is also helpful to understand exactly what the Zacks industry rank is. It is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800-lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list.

After all, if there are only two firms in the industry, it is relatively easy to get a Zacks Industry Rank of 2.00 (i.e. one with a Zacks Rank #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 206 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. 

Retail Rings It Up

The Retail sector jumped into first place at the sector level this week, with an overall score of 2.75, a very significant improvement over the 2.87 average last week. Given the number of firms in most sectors, the overall scores do not tend to move that far away from the neutral level of 3.00, and a 0.12 point move in a week is a noteworthy one.

While being 0.25 points below the 3.00 level for a sector is not unheard of, it is not something that happens every week either. Note that the retail sector also has the highest revisions ratio for 2010 at 3.37, and its revisions ratio for 2011 is also extremely healthy at 2.61.

The Auto sector, which is much smaller than Retail in terms of total number of firms, also posted a very nice improvement and is in second place.

While most of the retail industries showed some improvement in their ranks, there were major differences in the overall levels the industries were at. For the best industries within the sector, it looked sort of  like a barbell strategy. Firms that cater to the lowest part of the income distribution did well, as did firms that were aimed at more frivolous luxury purchases.

Jewelry Sparkles

While with Valentines Day almost upon us jewelry purchases might not seem that frivolous, but in the bigger scheme of things, does anyone really NEED jewelry? It is among the most discretionary of discretionary purchases. The group is relatively small with just four firms in it, but it moved up 57 spots to land in 9th place out of the 255 industries we now (just revamped and up from 206) cover.

The overall Zacks Rank for the group is 2.00 -- a nice improvement from the 2.75 it had last week. The two firms sporting coveted Zacks #1 Ranks were Signet Group (SIG - Snapshot Report) and Tiffany’s (TIF - Analyst Report).

Discounters Make Gains

The customer profile for the average shopper at Big Lots (BIG - Analyst Report) could not be more different than the profile for the average shopper at Tiffany’s. Yet it too sports a Zacks #1 Rank and is part of the Discount Retailers. That group now sits in 22nd place after an improvement of 10 spots. Its overall Zacks Rank is at 2.31 vs. 2.38 last week. Other Discounters with Zacks #1 Ranks include Sears Holdings (SHLD - Analyst Report), the owner of K-Mart, and Tuesday Morning (TUES - Snapshot Report).

Convenience & Drug Stores Get Better

The biggest improvement in overall positions were two stocks that ended up tied for 118th place among the 255 industries, both with perfectly boring overall industry ranks of 3.00. The Convenience stores vaulted 122 spots due to an improvement from an average rank of 3.50 last week, while the Drug stores improved 77 spots as last week they had an average rank of 3.17.

Supermarkets Not So Super

At the other end of the spectrum, though, is the Supermarket industry. While it too showed an improvement in rank of six spots, it is still mired in 232nd place overall with an average Zacks Rank of 3.40. Winn Dixie (WINN) decidedly does not look like a winner with a dreaded Zacks Rank of 5.

The two big names in the industry, Kroger’s (KR - Analyst Report) and Safeway (SWY - Analyst Report) look only a little bit better with Zacks Ranks of 4. In other words, it would make sense to do your investment shopping at places like Tiffany’s or Big Lots, not at the supermarket.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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