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3 Retail Stock Picks This Holiday Season

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Holiday season is around the corner, but the U.S. economy does not seem to be fully in the festive mood. The government shutdown and the ongoing political tussle, uncertain economic recovery, and soft job opportunities are having a rippling impact on investors’ sentiment, which continues to be jittery.

What Is Impacting the Holiday Season?

With the government shutdown entering its second week and the fast approaching Oct 17 debt ceiling deadline, markets have reasons enough to gradually turn apprehensive. The Dow Jones Industrial Average lost 136.34 points (or 0.90%) yesterday before closing at 14,936.24.

The Standard & Poor's 500 Index shed 14.38 points (or 0.85%) to finish the trading session at 1,676.12. The Nasdaq Composite Index fell 37.38 points (or 0.98%) to end the day at 3,770.38.

It is obvious that markets remain susceptible to the economic impasse and we may witness further decline until the cloud of obscurity is not removed. The overall scenario doesn’t seem much convincing as of now and the Federal Reserve is continuing with its $85 billion monthly stimulus program to keep interest rates low and boost economic growth.

The economic data is also not favorable. Unemployment rate is currently hovering at around 7.3%, which is still well above the Fed’s target. Further, Conference Board data suggests that Consumer Confidence Index dropped to 79.7 in September, down from 81.8 in August.

Need to be Hawk-Eyed This Season

Retailers need to be ‘hawk-eyed’ this holiday season to make the most of it. They need to grab every opportunity as and when they come, and try all means to drive in cautious, budget-constrained consumers to the shop as the season may be a tough one.

Data compiled by ShopperTrak suggest that retail sales are projected to increase 2.4% this holiday season. However, the expected growth rate has tempered down from 3% registered in 2012, 4% in 2011 and 3.8% in 2010, hinting at a stiff competition ahead. This leading provider of shopper analytics also revealed that store traffic would decline 1.4% during this holiday season as against an increase of 2.5% witnessed in 2012.

What is further making this holiday season challenging for retailers is the time frame - as 2013 presents only 25 days between Black Friday and Christmas as against 31 days last year. Moreover, retailers, who witness more traffic during weekends, will have only 4 full weekends this time around versus 5 in 2012.

We believe retailers will leave no stone unturned to tap this holiday season. Be it early-hour store openings, promotional events, free shipping on online purchases or heavy discounts, retailers will try all tricks to boost sales.

Retail Still a Lucrative Investment Opportunity

Banking on its wide spectrum, the retail sector still remains a lucrative investment opportunity for investors. A reflection of that was evident from the SPDR S&P Retail (XRT - Free Report) and Market Vectors Retail ETF (RTH - Free Report) surging roughly 30% and 24.4% year-to-date, respectively, which were ahead of the S&P 500 that rose 14.6% so far this year.

Thus, identifying the future winners from the sector would be a prudent idea to make an investment decision.

Three Stocks That May Enrich Your Portfolio

Here we focus on three stocks with above average earnings growth that you can capitalize on and enrich your portfolio.

We suggest investing in Deckers Outdoor Corporation (DECK - Free Report) . Product innovation, effective cost management, store augmentation and a strong focus on profitable markets have facilitated the company to keep afloat in this sluggish economic environment. Shares of this Goleta, CA-based company and a Zacks Rank #1 (Strong Buy) stock currently trades at a forward P/E (price-to-earnings) of 16.63x, a discount of 15.5% to the peer group average of 19.69x, suggesting upside potential. Moreover, an impressive long-term expected earnings growth of 15% makes the stock attractive.

Carter's, Inc. (CRI - Free Report) , a designer and marketer of branded children’s wear, is another stock to bet your bucks. This Zacks Rank #1 (Strong Buy) stock has amassed a year-to-date return of 35.5%. The company’s long-term estimated EPS growth rate is 17.2%, higher than the peer group average of 15%. Moreover, this Atlanta, GA-based company is expected to witness earnings growth of 18.8% in 2013 and 19.7% in 2014.

Another stock that investors may wish to consider is L Brands, Inc. . The company commands a market leading position in the lingerie, personal care and beauty segments. This Zacks Rank #2 (Buy) stock has amassed a year-to-date return of roughly 30%. Though the stock looks a bit pricey with a P/E multiple of 18.90x, it should not disappoint investors given the company’s long-term expected earnings growth of 12.3%.

We believe that the above stocks with strong fundamentals and growth prospects are capable of quenching investors’ search for the right stocks.

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