Let's Dissect This Stock Picker's Sector for Profits

Can you think of a sector that has been beaten up more by the media than the retailers? Seriously, every time I hear the retail sector mentioned, it's in a very poor light.

Truth be told, the sector's poor reputation is earned. Year to date, the retail ETF has earned around 4% compared to the broader market S&P 500 Index, which has grown by almost 20%.

It gets worse. Since July 11, 2014, the SPDR S&P Retail ETF (NYSEArca: XRT) has lost 1% while the S&P 500 has given you returns of 52%!

So, I've been talking about how this is a stock picker's market. Want proof?

Year to date, the 20 worst-performing stocks in the XRT have lost an average of almost 40%. The top 20 performers? They've earned an average of almost 50%. Polar opposites! Bottom line, if you pick the wrong stocks in the group, you get slaughtered. And if you get the right ones, you look like Gordon Gecko (minus the cheating).

I talk about my proprietary Best in Breed ranking system often. This system has scored the retail ETF as a sell for more than a year, which has been the right move, as the shares have lost 14%. While the XRT has been a great short, it's also a great example of how it's possible to make money as long as you've got the right tools to pick the stocks correctly every time.

Looking at the retail sector with the Best in Breed system right now reveals a number of companies that are among the top-ranked as we head into the middle of July.

Let's take a look at the two companies in the retail sector that are on my bullish radar...

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These Retail Plays Are Prime for Picking

Our first company, CarMax Inc. (NYSE: KMX), operates as a retailer of used vehicles and also generates revenue through its financing arm, CarMax Auto Finance. Looking at the recent trends, retailers are taking advantage of the pre-owned automobile markets as sales increase.

It makes sense, really. Most autos are coming with transferable warranties that are now covering cars for 10 years or more. That combined with higher retained values has lifted demand for pre-owned vehicles.

CarMax shares have been in an intermediate-term bullish trend that is strengthening. Shares started a low volatility rally in April that has outpaced the S&P 500 by returning 27%!

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Short-sellers have been loading up on bets against CarMax stock, which is setting the shares up for a potential short-covering rally that will shoot the stock toward $100.

The next round of earnings from the company isn't due until September, so there's plenty of time for this stock to perform on its technical trend and to continue outperforming the retail sector and broader market.

The stock is considered a buy at current levels. Those of you that trade options might want to consider the Oct. 18 calls, which are trading around $4.40 (KMX191018C00090000).

Our second pick is Ingles Markets Inc. (NASDAQ: IMKTA), a lesser-known company. Ingles Markets is a regional grocer that operates more than 200 stores in the southeastern United States.

The Best in Breed system targets Ingles Markets as a bullish standout in the retail sector due to its price trends, strength against peers, options activity, and short interest activity.

Short interest has been swelling as the stock continues to make a relative strength move against its peers and the broader market. The recent rally that started in April has just generated a "golden cross" pattern. This bullish technical pattern is the result of a strengthening trend and is normally a forecaster of even stronger prices to come.

Currently, the stock is trading around $32, with my Best in Breed system forecasting a target of $38 (IMKTA191115C00035000).

The stock is a good addition to a diversified portfolio, and options traders might consider the Nov. 15 $35 calls as an attractive option to leverage the expected bullish move.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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