UBS Turning More Upbeat on Retail Stocks

Hoping the tax relief package will lure shoppers into stores.

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Retail stocks, which have taken a pounding so far this year, posted modest gains Friday on hopes that the tax relief package will lure shoppers back into stores. The S&P Retail index—which hit a three-year low on Tuesday—gained 0.8% on Friday, led by stocks including Nordstrom (NDS), J.C. Penney (JCP), and Kohl's (KSS).

In a note to clients Friday, UBS analyst Brian Nagel said he's turning more upbeat on the prospects of retailers. "We believe that retail stocks now discount for a potential recession in the U.S. and are poised to rebound as the market mindset shifts from 'will the economy slip into recession?' to 'who will perform in a recovery?'" Nagel upgraded Bed Bath & Beyond (BBBY) and Staples (SPLS) to "buy", sending shares up 0.7% and 1.3%, respectively. Nagel reiterated "buy" ratings on a slew of other retailers, including Best Buy (BBY), Pier 1 Imports (PIR), Nordstrom, and Under Armour (UA). He's especially optimistic about hardline retail, which includes housewares, hardware, and electronics (essentially retailers that don't deal in apparel).

Historically, the shares of retail companies have bottomed out before a recession hits—but they tend to recover before other stocks, Nagel writes. If investors wait for retailers to begin beating analyst forecasts, "they will risk missing at least the early stages of an up tick in the retail sector."