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The Best Way to Profit From the Holiday Shopping Frenzy

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Keep an eye open for those retailers that might be immune to price matching, either because they are offering something that their rivals can't readily replicate or because they are a brand that really commands loyalty.

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Black Friday is history. Now it's time to welcome Cyber Monday, another day of frenzied shopping and large-scale dealmaking and attempts by retailers to coax every last dollar out of your wallet. Online sales could exceed $1.5 billion today, according to comScore Inc.
But while shoppers spent an estimated $423 apiece from the early openings on Thanksgiving Day itself through to the end of the day Sunday, up 6% from last year's levels according to a survey conducted for the National Retail Federation, investors should be cautious before they add retail stocks to their portfolios, other than on a very selective basis.

Trends that are great for consumers can turn out to be less than lucrative for retailers. True, Wal-Mart (NYSE:WMT) faced down union protests and offered deals that must have tempted even those who recoil at anecdotes of workers trying to live off wages that hover just above poverty level. And Wal-Mart's stock jumped on Friday in response to reports that sales traffic was higher than it was in 2011. But the shares have given back most of that gain today, and what remains to be seen is how those discounts affected the retailer's bottom line.

That's one of the concerns that lingers over the retailing sector in general. With more than half of this year's Black Friday shoppers reporting venturing online as part of their strategy, and comScore reporting that online sales on the day topped $1 billion for the first time ever, merchants already had pledged to meet discounted prices offered by Amazon and other online vendors in order to hang on to market share and sales volume.

But offering big loss leaders can be tricky. It's less difficult for an online vendor like Amazon to keep shoppers glued to their screens as new deals roll out every 20 or 30 minutes than it is for a Wal-Mart or Target (NYSE:TGT) to convince exhausted shoppers to stick around for the next hour's deals rather than just head home to nosh on turkey sandwiches – or check out a rival's deals instead.

The key to coaxing shoppers out of their homes on Thanksgiving and keeping them in the stores were big discounts. If razor-thin margins are the price that retailers have to pay for sales and foot traffic, the question becomes how big a sacrifice they are willing to make. Best Buy (NYSE:BBY) is the poster child for this problem, having fought (largely in vain) the phenomenon of "showrooming" for some years now. The rationale behind these deep cuts, as execs at Best Buy and other retailers say, is to earn customer loyalty. But it's hard to see how much loyalty customers have to any specific vendor when they choose to buy a camera at one store rather than another because the price is $3 cheaper.

There also is the broader question of the economy and – yes – the fiscal cliff. Just because the retail season got off to a great start doesn't mean that this can be sustained over the next four or five weeks. Most shoppers have finite resources, and their willingness to keep spending will be shaped by how confident they are that their paychecks next year – when the credit card bills arrive – will be large enough for them to meet those payments. If they are worried about the security of their jobs or that higher taxes will eat into their disposable income, odds are they'll stop spending when they hit that limit. It's not a question of how much they spend on the opening weekend of the holiday shopping season, but of how much they are willing to spend between now and the new year.
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No positions in stocks mentioned.
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