Breakout

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3 Ways to Play Back-to-School Stocks

Breakout

The nation's major retailers begin reporting Q2 earnings this week — a fact that will come as a surprise to traders suffering from Olympian hangovers and the summertime blues. The smart money will snap out of the funk and start paying attention — the consumer is the lynchpin of the U.S. economy. Government data on the consumer is worthless relative to what you can hear on major merchants' conference calls.

In the attached clip Brian Sozzi, chief equities analyst for NPG Productions, gives three favorite ways to play retail heading into the back-to-school and holiday seasons.

Buy American Eagle Outfitters (AEO)

Never bottom-fish specialty retail stocks. If a specialty chain is warning now, it means they're out of synch with the customer on back to school and unlikely to regain their mojo for the holidays. Better to pay up for winners.

Sozzi's winning pick is American Eagle Outfitters. "They're taking share in the U.S., driving better fashion, driving better pricing," he says, adding a Sheen-esque "winning."

Short Kohl's (KSS)

Kohl's stock and debt took a whack last week when the company lowered its 2012 earnings expectations. The company is still too optimistic. Warnings from retailers are like cockroaches in your kitchen: there's never just one. "I didn't like the hope they were selling to the world," says Sozzi.

Buy Dollar General (DG)

Having gained over 60% in the last year, Dollar General has become a popular target for short sellers. Sozzi thinks the bears will continue to go hungry.

In a value-hungry world, DG is giving the people what they want at the right time. Sozzi is a believer in the Dollar General's back-to-school pricing model, and he thinks the company has a kicker the bears may be missing with a growing online business.

"Share gain," says Sozzi. In a store-saturated country with almost no economic growth, it's all about picking the companies grabbing a piece of the other stores' pie.

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