In early July, I wrote a column saying that the top retailing stocks were poised for a rally because the Fed appeared to be nearly done with its rate hikes. The group did rally a bit, but the bounce didn't last. Now disillusioned analysts are downgrading the stocks from strong buys to accumulates. They don't question the companies' long-term prospects, but they do caution that the stocks could be dead money for a while. I may have jumped the gun and called the turn in these stocks too early, but I think analysts are making a mistake to downgrade the group at this point.
Top retailers are now quite cheap, compared with their valuations over most of the past two years.
And barring an unexpected recession, odds are that the next surprise will be a favorable one. The best case would be an interest rate cut by the Fed around year-end or early in 2001. I first recommended Home Depot and Wal-Mart back in February at prices around today's levels, saying that the companies were poised to lead the next wave of online retailing. My argument was that momentum was shifting away from the pure e-tailers to the dominant traditional chains. As the technology for online retailing became simpler, the winners would be the companies that had the greatest retailing talent and the economics of scale to price most aggressively.