NEW YORK (TheStreet) -- The retail industry has been one of the best-performing groups in 2014. And there are plenty of reasons why that shouldn't have been the case. Not the least of which has had to do with investors entering the year with some economic indicators still pointing to weakness in U.S. economy.
But with year-to-date gains of 16% in multiline retail and 20% in specialty retail, investors demonstrated they were not as price sensitive in their stock selections as they were when shopping for their goods. Both groups, which are a part of the consumer discretionary sector (up 11%), have outperformed the 8% gain in the S&P 500 (SPY) and the 4% gain in the Dow Jones Industrial Average (DJI) .
Investors want to know if this performance can continue. The answer to that is yes. But before we discuss why, let's take a look at some of the storylines in retail that made 2014 one to remember.
Among the most compelling stories in 2014 was the drama that unfolded within the dollar discount store sector.
In July, Dollar Tree agreed to buy Family Dollar for $74.50 per share, assigning an enterprise value (cash, stock and debt) to Family Dollar of around $9.2 billion. Dollar General immediately responded with its own bid for Family Dollar, upping the offer to $80 per share bid in August, valuing Family Dollar at $9.7 billion.
Preferring to be acquired by Dollar Tree, Family Dollar rejected Dollar General's offer on Sept. 5. In order to gain antitrust approval, Family Dollar -- despite receiving a lower offer from Dollar Tree -- revised its deal with Dollar Tree, agreeing to divest as many stores as necessary so the deal will be cleared.
After several months with no new developments, on Oct. 31, Dollar General said it extended its tender for Family Dollar until year's end, urging Family Dollar shareholders to vote against the Dollar Tree deal. With roughly two weeks left in 2014, it remains to be seen where Family Dollar ends up. It's doubtful anything happens until 2015. But suffice it to say, the story between these three rivals is far from over.
Another interesting and perhaps disappointing story this year was the huge step backward taken by J.C. Penney (JCP) , whose shares have lost 30% in 2014. Compared to rivals Kohl's (KSS) (up 2%) and Macy's (M) (up 18%), Penney investors have placed the wrong bet.
Penney shares have a good chance of rebounding in 2015, however. The retailer's ongoing restructuring efforts, aimed at cleaning up its books and cutting costs, is accelerating the pace of this turnaround. And with some luck in execution, these shares could be worth between $10 and $12 in the next 12 months to 18 months, based on 2016 estimates of a loss of $1.44.
Plus, these shares are trading on at price-to-book ratio of 0.80, compared to the industry average of 2.00. Both Kohl's and Macy's trade on ratios of 2.00 and 4.02, respectively. At some point, Penney will trade on par with its peers. And with the stock already so beaten up, now's the best time to take a chance.
Last week, the struggling electronics retailer reported a loss of $1.23 per share, much wider than last year's loss of 90 cents and worse than Wall Street estimates of a loss of $1.04. Revenue, meanwhile, declined 16.1% year over year to $650.2 million, also missing estimates of $717 million.
Management is not giving up, however. With cost-cutting plans and eliminating jobs, RadioShack is working to turn its fortunes around. Very few believe it can be done. And I wouldn't bet my own money looking for a contrarian play. This ship has sailed.
To win in 2015, investors should look to consistent winners like Home Depot (HD) (up 21%) and Lowe's (LOW) (up 32%). Home is still where the heart is. In 2014, it's also where the profits were. With a housing recovery still on track, look for both retailers to maintain their momentum well into 2015.
With consumers saving more at the gas pump due to the drop in oil prices, more money is left over to shop for food, clothes, home furnishings and other discretionary items. Couple this with the improved unemployment rate and any expected rise in minimum wage, and spending will be higher in 2015. And retail -- particularly the likes of companies such as Walmart (WMT) (up 6%) and Best Buy (BBY) (down 7%) are where investors should want to shop for some good investments.
TheStreet Ratings team rates FAMILY DOLLAR STORES as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate FAMILY DOLLAR STORES (FDO) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures, solid stock price performance and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: FDO Ratings Report