Stock Watch: The retail sector is poised for upside

As the theme of 2023 continues into 2024, seeing technology stocks and, more specifically, semiconductor and artificial intelligence names dominate the headlines, it could be easy to miss other promising assets in less talked about sectors.

A sector that has quietly gained more than 15% over the past three months and consolidated near the high end of its 52-week range may surprise you. The retail sector, specifically its popular ETF, the SPDR S&P 500 Retail ETF New York Stock Exchange: XRTit has been positive since the beginning of the year and has increased significantly compared to the previous three months.

Additionally, the ETF is consolidating above its major rising moving averages in a bullish formation, suggesting the sector may be on the verge of a breakout. Notably, the top sector ETF holding just reported impressive earnings, which could increase the odds of a sector-wide breakout.

Let’s explore the ETF and its key holdings in more detail to better gauge sentiment.

What is XRT?

The SPDR S&P Retail ETF seeks to mirror the performance of the S&P Retail Select Industry Index, an equally weighted market capitalization index representing the retail subsector within the S&P Total Market Index. The ETF invests in various retail sectors, including apparel, automotive, food, department stores, online retail, general goods, pharmaceutical retail, hypermarkets and supercenters.

The ETF has $421 million in assets under management and offers a dividend yield of 1.77% and a net expense ratio of 0.35%. The geographic exposure of its holdings is predominantly in the United States, with 98.5% exposure to the region. Regarding sector exposure, the ETF is primarily exposed to the Consumer Discretionary sector, with an exposure of 67%.

XRT holds an aggregate Hold rating based on ratings from 656 analysts covering approximately 71.3% of its portfolio across 50 companies. Looking at its price target, XRT stands at $72.83, in line with current prices. Analyst forecasts range from $50.29 to $95.82, considering the range of valuations within the 50 portfolio companies.

From a technical analysis perspective, $74 and $72 are the key areas to watch for the sector ETF, with the former serving as significant resistance and the latter as support. If the ETF can break above resistance and hold, the likely outcome could be a move towards its January 2023 high near $76.

The ETF’s top 3 holdings point to further upside

The ETF’s top holding is Carvana NYSE:CVNA, with a weight of 3.21%. Year to date, the stock is up nearly 20% after reporting record results for the fourth quarter and full year 2023 on Thursday afternoon. The recent increase in earnings could lend a helping hand to the ETF, contributing positively to its overall performance. Sentiment remains mostly bearish on CVNA, with a downgraded rating and a price target of over 30% downside.

Its second major holding is Signet Jewellers NYSE: MR, with a weight of 1.65%. Year to date, the stock is down just over 2%. However, in the span of three months, it increased by an impressive 29%. With the stock near a significant inflection point near $108, a move above resistance could trigger a notable shift in momentum higher and help the overall sector push higher.

Kohl’s New York Stock Exchange: KSS it is the ETF’s third largest holding, with a weight of 1.62%. Since the beginning of the year, the stock has slightly outperformed. Year to date, KSS is up nearly 6% and just over 18% in the past three months. The stock has spent the last few months consolidating near a major breakout level near $28. Similar to the SIG, a move above this level could indicate a shift in time momentum higher and the start of a new uptrend for the stock. Given its weighting in the sector ETF, such a move could affect the performance of the entire sector.

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