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The Retail Revolution Unveils a ‘Strong Buy’ Opportunity The Retail Revolution Unveils a ‘Strong Buy’ Opportunity

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β€œIt is not the strongest of the species that survives, nor the most intelligent. It is the one that is most adaptable to change.” – Charles Darwin

The financial markets are a dynamic place. Swift and everchanging, they can often seem like a complicated and confusing environment. The great thing about the stock market is that it’s not a one-size-fits-all atmosphere; many different approaches can be successful.

One of the ways we can effectively adapt in times of change is by paying attention to signs of sector rotation, or the movement of money invested in stocks from one sector to another. Sector rotation can help guide us to economically-sensitive companies during bullish times, and help us shift to investments that can better weather economic downturns given a bearish outlook.

Unsurprisingly, the economic cycle influences the rotation of stock market sectors. Knowing the stage of the cycle can help investors position themselves in the right sectors and avoid the wrong ones. Due to the fact that economic data is generally lagging and investors price in their estimates in advance, the economic cycle lags behind market movements.

A Closer Look at the Zacks Sector Rank

The majority of leading stocks are usually in leading sectors. Roughly half of a stock’s future price appreciation is due to its underlying sector and industry group combination, and because specific sectors lead different phases of the cycle, we can see how important it is to consider a stock’s sector before deciding to make a purchase.

The Zacks Sector Rank helps us identify which sectors (along with corresponding industry groups and individual stocks) are primed to outperform. The average Zacks Rank is calculated for every sector every day. A top Zacks Sector Rank means more stocks within that group are receiving upward earnings estimate revisions. Earnings estimate revisions lie at the heart of the Zacks Rank, and these revisions have been shown to be the most powerful force impacting stock prices.

Strategic Sector Performance over Time

To further highlight the significance of picking stocks in the best sectors, take a look at the chart below. We put all sectors into two groups: the top half (i.e., sectors with the best average Zacks Rank) and the bottom half (the sectors with the worst average Zacks Rank).

Over a 10-year period, the top half of sectors outperformed the bottom half by nearly twice as much. The top blue line is the performance of the top 50% of Zacks Ranked Sectors, while the orange line is the performance for the bottom 50% of Zacks Ranked Sectors. The maroon line is the S&P 500.

Zacks Investment Research
Image Source: Zacks Investment Research

This Sector Is On a β€˜Buy’ Signal

Evidence continues to mount suggesting bullish outcomes moving forward. We are seeing signs that lead us to believe the more aggressive and cyclical sectors have room to run in this new bull market.

The SDPR S&P Retail ETF XRT, a Zacks ETF Rank #2 (Buy), provides exposure to industries such as apparel, automotive, computer and electronic, department stores, drug and pharmacy, food and supermarkets, and internet retail. XRT allows investors to take a strategic or tactical position in the retail sector at a more targeted level.

The XRT ETF has bounced back from the 2022 bear market and is now making a series of 52-week highs. This ETF is breaking out thanks to strength in its underlying retail holdings. XRT has risen more than 30% off last year’s correction (which ended in late October), as investors shifted back to retail stocks and more aggressive consumer discretionary companies.

Image Source: StockCharts

One individual stock that is breaking out to the upside is The Gap GPS. The Gap is a premier international specialty retailer that offers a diverse range of clothing, accessories, and personal care products. The company tailors to both men and women with products under well-established brands such as Old Navy, Gap, Banana Republic, and Athleta.

The apparel retailer has put together an impressive earnings history, surpassing earnings estimates in each of the last four quarters. Earlier in March, the company reported fourth-quarter earnings of $0.49/share, a 145% surprise over the $0.20/share consensus estimate. The Gap has delivered a trailing four-quarter average earnings surprise of 180.9%.

Zacks Investment Research
Image Source: Zacks Investment Research

Analysts covering GPS are in agreement and have been increasing their full-year earnings estimates as of late. For the current quarter, analysts have increased earnings estimates by 33.33% in the past 60 days. The Q1 Zacks Consensus EPS Estimate now stands at $0.12/share, reflecting a staggering potential growth rate of 1,100% relative to the same period in the prior year.

GPS stock is surging on high volume and has advanced more than 190% in the past year. This is the kind of stock we want to include in our portfolio – one that is trending well and receiving positive earnings estimate revisions.

Image Source: StockCharts

Final Thoughts

Sector rotation can help guide us to economically-sensitive companies during bullish times such as the current environment. Since the majority of leading stocks are part of the strongest sectors, it makes sense to remain abreast of sector rotation.

Right now, the retail sector is breaking out thanks to underlying strength in stocks like GPS. Make sure to keep an eye on this pocket of the market as it looks like there’s more upside ahead.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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