INVESTING: SHOPPING FOR SMART BETS

There are 75 shopping days until Christmas, but Don Hodges, who manages the Hodges Fund, is already loading up. He's picked up some shares of Costco, Wal-Mart, Neiman Marcus and Sharper Image, positioning his four-star fund for what he hopes will be the profitable season to come. "Interest builds in retail stocks in the fall," he says. "Everyone watches with bated breath to see which ones look like they are doing well."

Should you, too? Retail stocks can seem like good bets if investors time them just right. After all, some chains make as much as 40 percent of their sales in the fourth quarter. But this year is shaping up to be tricky. Several of the big names, like Costco, Limited and Wal-Mart, reported disappointing September sales, and retailers are predicting a tough 2004 season compared with 2003, when shoppers were flush with instant tax -rebate checks.

Timing is critical, as well. A new study by Lehman Brothers analyst Alan Rifkin says that retailer stocks often drop in the fall during the kind of market jitters we're seeing now. Shares then rise once sales reports start to sink in early the following year. So smart investors will buy during those dips and wait until 2005 to sell.

It's not just when to buy, but what. Wall Street's favorite retail measure compares a company's current sales to sales from the same stores the previous year. You can add revenue by opening new stores, but real stars squeeze more money out of the same locations, year after year. Because 2003 was so bright, only gems can post big year-over-year gains. Which companies are on the pros' shopping lists? A few top picks:

Claire's Stores (CLE). Parents may hate the piercing craze, but for investors in Claire's, it's good business. Earnings are up almost 50 percent in the last year; last week, it said September sales were up 13 percent. Even retailing bears like Alex Vallecillo of the Armada Funds like this stock, saying shoppers, including those on tight budgets, will keep picking up the $5 impulse items--like earrings, bracelets and necklaces--that Claire's sells. "It's not something you have to take a second mortgage on your house to do," says Vallecillo.

Best Buy (BBY). Gotta have that flat-screen TV? You're not alone. "Even in a tough environment, people will spend money on new technology," says Erik Becker of Waddell and Reed. Becker likes Best Buy --because it's adding market share and expanding into Canada, and same-store sales are up 20 percent.

Petco (PETC) and Petsmart (PETM). You can always shortchange friends and family on gifts, but the family dog or cat? Never. Alan Rifkin of Lehman Brothers says both companies are well run and are in a business that's immune to broader swings in the economy. Petco's same-store sales have grown by at least 4.6 percent for 46 consecutive quarters; Petsmart is offering pet hotels and launching a customer loyalty card that Rifkin thinks will boost earnings.

Neiman Marcus Group (NMGA). High-end retailers like Neiman can ride out rocky economies, too, better than lower-end stores. Hodges says that at $58 a share, the com-pany's price-earnings ratio is a cheap 13, and its annual dividend is just under 1 percent a year. Same-store sales grew at about 6 percent over the last year. And just look at its holiday catalog, filled with bowling alleys, custom suits of armor and $10 million zeppelins. Those items pack hefty profits.

Chico's (CHS). What about this longtime Wall Street darling (investors earned an average 57 percent return a year for five years running)? It can be tempting still, with same-store sales up 13.5 percent so far this year. But investors beware: it's priced for continuing fabulous returns, and there's little margin for error. Maybe cautious investors should heed the advice of Vallecillo of the Armada Funds. As he likes to say, "Buy the clothes, not the stock."

INVESTING: SHOPPING FOR SMART BETS | News