Back-to-School Looks to Some Like Bear Trap

Two key funds offer ways for investors to profit whether retailers outwit the bears or not.
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Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Gregg Greenberg joined NBR to preview the holiday shopping season and discuss mutual funds for cashing in on retail.(Watch video and see transcript)

NEW YORK (TheStreet) -- Retail stocks dependent on big back-to-school seasons will get their grades in the next few weeks. They better pass with flying colors or even Santa Claus won't be able to save them.

Consumer spending is credited with making up two-thirds of the nation's GDP, so the two major spending seasons -- back-to-school and Christmas -- are make-or-break for America's retailers, as well as the entire economy. The country's retailers started discounting their wares early this summer as cash-strapped shoppers patiently pressured them into marking down their merchandise.

"Back-to-school has been extremely aggressive in discounting this year," says Eric Beder, associate director of equity research at

Brean Murray Carret & Co.

"Retailers entered the season with too much inventory, primarily because they bought it after what they thought was a very solid holiday season last year."

In terms of what sectors will be most affected, analysts say clothing will see the most serious decline in spending as parents continue to hold out on buying unnecessary or expensive items, opting for the basics and essentials. Toon van Beeck, senior analyst at

IBISWorld

, expects apparel companies to "aggressively push for market share," a trend he says will be "particularly true for the denim category."

Fortunately for teen retailers, the back-to-school shopping season extends a few weeks into the school year as kids check out their friends' fashions at school, then run to the mall or go online to buy the latest styles from the likes of

Aeropostale

(ARO)

,

American Eagle

(AEO) - Get Report

,

The Gap

(GPS) - Get Report

or

Abercrombie & Fitch

(ANF) - Get Report

. Nevertheless, while this second wave may offer some retailers a reprieve, it will be the last one they get until Christmas.

"Back-to-school results among the teen retailers are a good indicator of where Christmas style trends will ultimately be," says Christine Chen, equity research principal at

Needham & Co

. "Styles don't change much from fall to winter, so the winners become clearer."

As a result of these seasonal trends, the fate of mutual funds specializing in retail stocks may crystallize in the next few weeks, reversing or adding to the gains in the retail sector over the past month. Retail stocks have outperformed in the past few weeks after August same-store sales at most retailers trumped lowered Wall Street targets.

For example, the

Fidelity Select Retailing Fund

(FSRPX) - Get Report

, which has risen almost 7% over the past month compared with a 4% rise in the

S&P 500

, could return those gains if the season ultimately falls flat. Conversely, an investment in the

ICON Consumer Discretionary Fund

(ICCCX) - Get Report

, up over 5% over the past four weeks, may extend its gains if shopkeepers such as

Target

(TGT) - Get Report

and

TJX

(TJX) - Get Report

show surprising back-to-school strength.

All that said, there remains a deep skepticism over the group considering the state of the economy, thus leading some retail analysts to call the recent back-to-school run-up a potential bear trap for investors.

"Christmas is not going to save the retailers," says Howard Davidowitz, chairman of

Davidowitz & Associates

. "The economy is a mess. The consumer is a train wreck. The worst is yet to come."

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