Individual investors should always consider the wisdom of Warren Buffett. In his 2008 letter to shareholders he wrote, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
The bear market has definitely marked down the prices of stocks. And the economic slowdown has helped uncover some long-standing problems with many companies.
But almost all companies have suffered sharp price declines, some more than they deserved to. These companies are now selling at bargain prices.
While analysts debate whether or not the recent surge in stock prices is the beginning of a bull market, individual investors should start thinking about which stocks to buy. The strongest sector in the stock market over the past six months has been the consumer discretionary — that is, retailers.
Sure, retail can be boring, but boring companies are the cornerstone of Buffett's fortune. Rather than looking for the next hot tech winner, investors may want to consider shopping for profits at the local mall.
The nation's economy is largely driven by the consumer. About seventy percent of the gross domestic product is related to consumer spending. So, the economy cannot recover from recession unless the consumer starts spending.
Since consumer spending will drive the eventual rebound, we should look at places where that spending will occur. Some of these stocks have already bounced off their own bottoms.
Sears Holdings (SHLD) is up more than 50 percent so far this year and has gained over 75 percent since the March bottom. Kmart, a subsidiary of SHLD is no longer losing money on guaranteed payments to Martha Stewart and is likely to benefit from the trend towards bargain hunting.
To confirm the economic recovery, investors can look at Land's End, another SHLD subsidiary. This is a more expensive brand, one that will benefit more from economic growth.
Aggressive investors might want to consider some individual names within the industry. GameStop (GME) is the largest retailer of video games in the country. As discretionary spending increases, they are likely to see further gains. In the meantime, they are the largest seller of used games at discount prices in the country and are likely to benefit from bargain shoppers. Year-to-date, the stock is up more than 30 percent.
Office Depot (ODP) has gained more than 200 percent since the March bottom. Like many financial companies, ODP took large write-offs in the fourth quarter of 2008. This is a common strategy for companies to get all the bad news out of the way at once.
Going forward, analysts expect double-digit earnings growth from ODP. The stock sells for less than half its book value, which means a bankruptcy is unlikely. This is a strong candidate for short and long-term gains.
But we also need to remember more of Buffett's advice, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
One way to invest in this idea without so much risk of picking a loser is through an exchange-traded fund. The SPDR Retail ETF (XLT) includes a large number of traditional retailers and online-only retailers. It offers diversification for those with a low risk tolerance and a recent dividend yield of more than 2 percent, which provides some income.
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