OK investment class 101: Name an economic sector that seldom goes bad when consumers are prying open their wallets, as they have done with great abandon over the past year?
If you said "Retailing," go to the head of the class, collect your new Visa or MasterCard, zoom to the mall, and spend to your hearts content!
Not really, of course. And who needs a new credit card anyway? US consumers have been more than making do with their current cards to rev up retail sales.
Sales rose 0.9 percent in February, according to the Commerce Department. January sales numbers were revised upward, showing a 1 percent gain.
"As long as you see strong job growth, low inflation, and low interest rates, the retailing sector will be very strong," says Dan Gillespie, senior portfolio manager for sectors with Rydex mutual-fund group, in Rockville, Md.
The Rydex Retailing Sector Fund, for example, is up 10 percent this year, and is both defensive and growth-oriented, notes Mr. Gillespie. Top holdings include WalMart, Home Depot, McDonald's, Walgreen's, The Gap, Dayton-Hudson, CVS, Lowe's, Costco, and Amazon.com.
But you don't have to buy just a sector fund to get a solid position in retail. Many other fund types carry retail stocks.
Consider the Seligman Large Cap Value Fund and Seligman Small Cap Value Fund. Both funds have held as much as 10 percent of their portfolios in retail stocks in recent months, although they are now slightly under that amount, says portfolio manager Neil Eigen.
"We think retailing looks very promising," says Mr. Eigen. "With unemployment so low and people having money in their pockets, a lot of that is going right back into retail stores. And there is also the 'wealth effect,' with people feeling wealthy because of gains in the stock market the past several years."
Mr. Eigen's retail holdings now include Sears Roebuck, Abercrombie & Fitch, and Tandy Corp. Eigen is also looking at Sak's as a possible buy, since the stock has fallen in value from about $44 last year, to about $24 now.
What's attractive about the retail sector is that even in periods of economic downturn, selected retailers will invariably do well because of basic consumer needs. Such firms include grocery chains, drugstores, and modestly priced discounters.
"Sales for discount stores and specialty stores should be up 5 percent or more this year through the fall. Sales for large department stores should be up at least 3 percent," says Kurt Barnard, who publishes Kurt Barnard's Retail Trend Report, an analytical review of the retail sector.
"In general, retail sales should be well above last year through the fall months," he adds.
If so, that would mean two back-to-back years of solid gains in retailing. Key segments of the sector topped the Standard & Poor's 500 Index's 26.7 percent return last year, including drugstores autos, building-supply firms, and household furnishings and fixtures.
Retail stocks - and retail-oriented mutual funds - are solid financial products for "someone who really believes in the power of the consumer," says Kevin McDevitt, who tracks retail funds for Morningstar.
But contrary to a widespread impression, retail stocks and mutual funds as a group, should not be considered "all-weather" funds that necessarily do well in both up and down markets.
Rather, Mr. McDevitt says, selective segments of the retail trade tend to be all-weather, and thus, good defensive stocks.
Defensive retailers include drugstore chains, and perhaps, some grocery chains. But retailers that load up on consumer durables could face difficulties if the economy were to shift into a sharp downdraft, he says.
Leisure-oriented mutual funds that tend to carry large entertainment companies, including movie chains, or video-game companies, both of which must be considered retail-oriented, are even more susceptible to losses in downturns, says McDevitt. In bad times consumers cut frills, he says.
One fund that McDevitt believes comes close to being an all-year performer is the Fidelity Select Food & Agriculture Fund.
The fund gained 16 percent last year, but, ironically, is down 5 percent this year, despite the strong economy. Holdings include grocers Safeway and Albertson's, food products, such as PepsiCo, Coca-Cola, Heinz, and fast-food chains, such as McDonald's. The fund also has tobacco and alcohol holdings.
* Previous sectors featured in this series: Banks & Brokerages, March 15; Autos, March 22; and Internet, March 29.