Picky Shoppers

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Not even retail is safe anymore.

Last October, when the

Dow Jones Industrial Average

plunged some 500 heart-stopping points over a meltdown in Asia, retailers provided a safe haven to money managers who shunned any company with international exposure. But now, some of the issues weighing on the market, such as

President Clinton's

sexual exploits and a slowdown in consumer spending, are closer to home.

"The retail stocks are caught up in the overall market mood," says Stephen Schuster, a New York money manager and former retail analyst with

First Manhattan Company

. "It's a market call whether or not to buy the retailers. There are no safe havens."

A large and long-lasting market decline would likely impact the retail group where it hurts most: consumer spending. Much of consumption is based on the wealth effect of the stock market. "I have no doubt that people walk around with balance sheets in their heads, calculating their net worth," says one money manager who specializes in retail stocks. Lose a bundle in

America Online

(AOL)

this week, and consumers may think twice before purchasing that new leather jacket or diamond bracelet. Another factor that may eat into consumer confidence is massive job cuts thanks to the rampant M&A activity.

One catalyst that might juice the group in coming weeks: July same-stores sales, which will be reported Thursday, are expected to be on plan for most companies. That means fewer big misses for second-quarter earnings, which will be reported in the next few weeks. While July is mainly a clearance month and is not the best crystal ball for the back-to-school season, Richard Church, an analyst with

Salomon Smith Barney

in New York, gave positive indications for the fall in his weekly same-store sales update. "Early indications about fall and back-to-school sales are encouraging ... during a time when investors are fretting about consumer spending slowing," he wrote in a note dated August 4.

Nevertheless, some money managers are hesitant to jump into this fast-moving market. Schuster, for instance, says he's waiting for a bottom, perhaps in the next week or so. He says

Sears

(S) - Get Report

has been oversold, but deciding when to buy in this dicey market is tricky. "You could've bought it this morning at 48 and a few minutes later at 46," he says. Two hours later, it was back to 48.

Analysts who make bold calls may find themselves ahead of a steamroller market that flattens even the positive stories. For instance, Michael Exstein, with

Credit Suisse First Boston

in New York, named

Federated Department Stores

(FD)

a featured stock on Monday, when shares traded at 52, down 7.4% from their 52-week-high of 56 3/16 hit last month. By Tuesday, shares had declined another 5.2% to 49 1/4, even though most analysts expect the department-store chain to report better-than-expected same-stores sales tomorrow.

With that backdrop in mind, some money managers are cherry-picking their favorite ideas. These are either quality stocks that have been knocked down with the group or companies that have underperformed in the first half of the year but are ready to show some spunk.

John Jarres, portfolio manager of the

Berger Balanced

fund in Denver, Colo., says he's looking for companies trading below their historic multiples with strong fundamentals.

Dayton Hudson

(DH)

is a prime candidate on his buy list. The retailer has seen continued strength in its

Target

discount-store chain, yet the stock has fallen 16% off its high to 45 Wednesday.

"Considering the third month of comparable-store sales will be reported Thursday, we'll know what everyone's revenue will be for the second quarter," Jarres says. "If a company's revenue exceeds analyst expectations and the valuations are reasonable, that's where I'd go."

TJX Companies

(TJX) - Get Report

, the off-price retailer, also has fallen off its highs. "They consistently deliver nice comps," says Helen Ng, an analyst with

Lexington Management

in Saddle Brook, N.J., who owns shares. Investors were pushing the shares up 6% Wednesday to 23 1/2 by midday.

Ng also likes

Consolidated Stores

(CNS) - Get Report

, which has been on the sidelines for the year's rally. The company, which sells close-out merchandise, ran into trouble after buying the

McFrugals

chain. Inventory backed up. But now, thanks to a remerchandising effort that is showing positive results, same-store sales should pick up speed in September, Ng says. "It's really a beaten-up stock that will do well going forward."

Just because the market's been on a downward slope for days doesn't mean certain stocks won't go lower. One to watch out for is

Lowe's Companies

(LOW) - Get Report

, the home improvement rival to

Home Depot

(HD) - Get Report

. Same-store sales gains slowed to 4.9% in June, compared with a 10.3% in May. If July is another slow month, momentum investors may begin to leave this house party.

Gymboree

(GYMB)

, the children's clothing retailer, is a favorite short of one New York money manager. Gymboree has felt the pain inflicted by rival

BabyGap

(GPS) - Get Report

, which offers cheaper, more basic apparel -- not to mention the marketing muscle of its parent.

In Gymboree's first quarter, which ended in May, the company reported that income decreased 52% to $4.1 million, or 17 cents per share, from $8.6 million, or 34 cents per share a year ago. While sales grew 21% to $103 million from $85 million last year, inventories more than doubled to $75 million, from $37 million last year. The company tried to work off that bloated inventory through heavy markdowns in June.

The stock has already fallen 63% to this year to 10. "Is this a concept that survives?" wonders the money manager.

For more info on institutional holders of these stocks, as well as financial statements and earnings estimates, please see the

Thomson Company Reports.