Retail Stocks 101: Tips for Investing in Your Favorite Fashion and Beauty Brands

With Coty's IPO imminent, Michael Kors doing gangbusters on the stock market and Fifth & Pacific selling shares via Facebook, we've never been more compelled to personally invest in the fashion and beauty brands we love. But before you go nuts on an E-Trade, here's a little tutorial. I've consulted Hitha Prabakhar and Brian Sozzi—two analysts who know a lot about the stock market, but also a lot about fashion and retail—on how to invest in a smart way.
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With Coty's IPO imminent, Michael Kors doing gangbusters on the stock market and Fifth & Pacific selling shares via Facebook, we've never been more compelled to personally invest in the fashion and beauty brands we love. But before you go nuts on an E-Trade, here's a little tutorial. I've consulted Hitha Prabakhar and Brian Sozzi—two analysts who know a lot about the stock market, but also a lot about fashion and retail—on how to invest in a smart way.
Do you love shopping at URBN? Maybe it's time to do more than shop. (Getty)

Do you love shopping at URBN? Maybe it's time to do more than shop. (Getty)

With Coty's IPO imminent, Michael Kors doing gangbusters on the stock market and Fifth & Pacific selling shares via Facebook, we've never been more compelled to personally invest in the fashion and beauty brands we love.

But before you go nuts on an E-Trade, here's a little tutorial. I've consulted Hitha Prabakhar and Brian Sozzi—two analysts who know a lot about the stock market, but also a lot about fashion and retail—on how to invest in a smart way.

Tip 1: Getting in on an IPO as an individual investor isn't the easiest thing in the world.

"As an individual investor, the way to get in on an IPO is to have an account with the investment bank that is underwriting the deal," says Prabhakar, who is also the author of Black Market Billions: How Organized Retail Crime Funds Global Terrorists. "But having $1,000 in an account isn't going to get you access. Usually investment banks give individual investor clients extra love in the form of access to an IPO if they have hefty balances or are frequent traders. Frequent equals 10 trades per month or more."

Okay, so say you are that rich. "Assuming by chance a person has that the money on file at the investment bank, they may want to stay clear of a company on its IPO day," says Sozzi, who runs his own advisory firm, Belus Capital Advisors. "My experience is that investing at that point is highly irrational, and the stock price swings wildly. In other words, one could lose a ton of money...quickly."

Tip 2: It is possible, and fairly easy, to buy and sell stocks individually once the IPO hullabaloo has settled. Just make sure you do your homework.

"You can open up an account at a brokerage firm, but if you are dealing with small balances—let's be honest, not many of us are opening accounts with a starting balance of $10,000—you may not want to go that route because of the fees," says Prabhakar. "I like Fidelity Investments for their $7.95 online trades and free investment help as well as TD Ameritrade because you get access to research and no account minimums. Scottrade is good because there are no annual fees."

But before you log on, make sure to research the stocks that interest you. "The process of buying a stock first starts by researching a company’s filings with the SEC, both recent and past performance," says Sozzi. "There is no reason to even consider opening up an E-Trade account if you have not researched at least 15 companies of interest and have five names you would like to own as soon as that E-Trade account is opened. Why do this? Simple. If you open the E-Trade account first with no stock ideas ready, you will feel overwhelmed and likely, turned off to the investing process." If you're not comfortable reading an SEC document—and really, if you want to do your own investing you should be—it's worth spending a few hours per company poking around each brand's Yahoo! Finance page.

Tip 3: Investing in a brand because you love it is okay. But only if it's an educated investment. "Ha. I know a lot of people who do this, but they also have two things. 1. A lot of money to play with. 2. They don't mind risk. Most of us aren't like that," says Prabhakar. "So I tell people if you like a brand or company, do your research on it. Ask these quick questions if you are looking at retailers: has the company had positive sales over the past months? What about the last year? Does management have a strong track record of creating revenues for the company? And lastly, what does future demand look like for the company? Answering these questions will help you make a more informed decision." Sozzi agrees. "A good example is Starbucks. You drink the coffee daily. You swipe the phone to pay each morning. The company is all over the supermarket. You obviously like the company and are spending money on its products, time to look into its financials (oh, and free earnings conference call transcripts)!"

Tip 4: Check out these hot stocks. "$TIF (Tiffany & Co.) has always been a favorite pick of mine because it's been a relatively consistent performer for the past eight quarters. I also like $KORS (Michael Kors) for the same reason: strong global sales, international interest and hits the sweet spot of good product mix with price points," says Prabhakar. "On the department store side, keep your eye on $M (Macy's). It's online business is killing it, and while I think the flagship store is not the most exciting place to shop the department store has garnered strong sales across the country. One more too, and don't laugh: $JCP (JC Penney). With Ron Johnson out and new management committed to turning it around by going back to its original customer base and mission, I see the company bringing it back to black in the next couple quarters."

"For our clients, we have been keen on $URBN (Urban Outfitters) and $TJX (TJ Maxx)," says Sozzi. "Urban Outfitters is running lean and mean on inventory with the founder back at the helm. And online for them is rocking. TJ Maxx is luring in a new younger customer base that enjoys thrift, is about to launch online, and is outperforming peers in Canada and Europe."