Five Reasons to Bet on Retail

Throughout my career on Wall Street I've looked for universal acceptance of a trend, theme or supposition. Why? Because in such cases, there is almost always opportunity to make money. By the time an idea is universally accepted by the masses to be truth, the market has probably reflected that truth. Contrarian investing doesn't always work -- especially recently! -- but one will never reap above-average returns by following the herd.

One universally accepted truth is that retail is finished, and the prospects have never been worse. It's little wonder! Unemployment is bad and getting worse, consumers are deferring large purchases, and almost every retailer out there has said the same thing -- this is the most difficult environment in years. All true, and all extremely frightening.

At the same time, this horrible backdrop is probably fully reflected in the stock prices. The Retail HOLDRs Trust (RTH - commentary - Cramer's Take) has actually outperformed the market from its highs in early September. But that index, which is dominated by a 26% weighting in Wal-Mart (WMT - commentary - Cramer's Take) -- a stock that has done exceptionally well during the downturn -- masks the incredible obliteration of retail stocks across the board.

Given that expectations are extremely low, there is a very good chance that retail spending will actually be better than expected this Christmas, and that the retail sector can enjoy a decent rally going into the end of the year.

We all know the negatives, but here are a few reasons retail can rally in the weeks and months ahead:

1. It's happened before: Retail stocks enjoyed a monster rally in late 1990.

For those who weren't following stocks back in 1990, let me give you the backdrop -- tell me if it sounds familiar. Still reeling from a real estate bust in its relatively early stages, the economy was fast going into a consumer-led recession. Banks were failing, and Citigroup (C - commentary - Cramer's Take) traded in the low single digits.

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At the time of publication, Bagley was long WMT, KSS, TGT, CVS, HD, BBBY, AAPL and NKE.

Jeffrey Bagley, CFA, is vice president and senior portfolio manager at Davidson Trust Company in Devon, Pa. Prior to joining Davidson Trust, Bagley was a portfolio manager at McCabe Capital Managers and a sell-side analyst at Schroder & Co. and NatWest Markets. He was also a senior analyst and editor at the Value Line Investment Survey and an investment analyst at The Vanguard Group.