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Hot and Cold Back to School Stocks


Retailers get set to do battle over students' wallets.

I could sense pessimism in the air as I roamed through my local mall this weekend while checking out the back to school shopping scene. Unfortunately, it wasn't just the gloomy faces of teenyboppers cringing with the upcoming start of school. Retailers – who in previous years would typically be overflowing with back to school shoppers – stood abandoned by their once loyal customers.

The National Retail Federation's annual Back to School Survey concurred with my observation. According to the survey, four out of five Americans say the economy is significantly affecting back to school plans. Back to school spending for K–12 students is expected to decline 7.7%. Even worse, spending on apparel overall is expected to drop 12.7%.

Beneath the dreary data, however, there was a hint of optimism for some companies. Spending on electronics is expected grow 11%. And nearly a quarter of families surveyed suggested they are likely to purchase back to school supplies at drug stores – a whopping 18% increase over last year.

Putting all these numbers together, I came to two conclusions:

1. In contradiction to my assumptions in previous years, parents can be constrained from overindulging their children with things they can't really afford.

2. With less dollars being allocated to back to school shopping budgets, this is going to be one heck of a competitive month in retail land.

Let's check out some of the major contenders:

Wal-Mart (WMT) vs. Target (TGT)
Target's chic line of merchandise is easy on the eye, but not on the frugal shopper's wallet. While the stores' prices fall into the discount category, similar but less frilly items can be had at lower prices at Wal-Mart. It's back to basics for most shoppers, so Wal-Mart's sometimes duller version of items will likely have to make due.

Dell (DELL) vs. Apple (AAPL)
It may be the age of frugality, but I am betting on Apple's premium priced products here. The company is doing its best to lure in cash strapped parents by offering a free iTouch with any purchase of a Mac. As a retired Dell user and an avid Apple user, I can vouch for the large gap in quality between the two brands. And it looks like I'm not the only one dissing PC's; according to a recent survey at the University of Virginia, the usage of Macs among first year students has risen 925% in the past five years. Apple wins hands down.

Abercrombie & Fitch (ANF) vs. Aeropostale (ARO)
If you take the labels off an item from each store, it would probably be difficult to tell the difference between the merchandise these two companies offer. Abercrombie does make a slightly premium product in terms of ware and tear quality – but for three to four times the price. In this economy, Aeropostale's budget friendly price tags are sure to capture the hearts of parents who want to make sure their kids fit in with trendy clothes without using a plastic card. Aeropostale is the clear winner.

As we move our way through August, the retail industry will begin to hit Wall Street's radar screen. These are definitely hot retail stocks to keep an eye on. While overall performance won't be reported until third quarter results are released, I'm betting on the winners I listed above to outperform their peers. And thus, these are the companies I peg to maintain the upward momentum they've got from the overall July market rally.
Position in AAPL
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