TJX Companies, Off-Price Retailer With Apple-Like Profitability

With consumer spending accounting for about two-thirds of GDP, it’s hard to ignore retailing stocks. Still, given the ups and downs of consumer tastes, sentiment and spending prowess, as well increasing competition both physical and cyber, it always seems easy for worry-warts to scorn this group. The key, here, ultimately, is to invest not simply in retailing but the right retailing and TJX Companies (TJX) seems a good way to do just that.

Of Factors and Themes

As readers familiar with my approach know, I’m not a story- or theme-investor per se, as reiterated by my writeup last week of a solar energy stock. So I’m not really interested in TJX because I specifically want retail. I pointed out the importance of this sector to establish why, unlike many theme-based investors, I’m not going out of my way to exclude it.

I choose stocks on the basis of factors, or objective quantitative fundamental-analysis based rules. Off-price (mainly apparel) retailer TJX came to my attention, and into my portfolio, through a model seeking lower-risk equity exposure. That approach hasn’t necessarily rewarded investors up till now as the Fed continued to pump out money like there’s no tomorrow. But risk may move center stage as and when the Fed finally feels a need to control the spigot or turn it the other way.

Quest For Lower Risk

As soon as we say the R-word, we feel a need to access our inner quants as we contemplate such jargon as standard deviation, volatility, Beta, etc. Beta is an especially revered item in this area. For what it’s worth, TJX shines in this regard with a Beta of 0.58 (meaning its stock return is only 58% as volatile as that of the S&P 500, versus an industry median of 1.10 (implying 10% more volatility than the market).

I’m not, however, going to stop here. Actually, Beta is, to borrow a phrase from U.S. Supreme Court Justice Antonin Scalia, “jiggery-pokery.” It can be a good answer, but often it’s for the wrong question. Beta only measures the path of a stock relative to the path of the S&P 500. This refers to the past, obviously, since we don’t have data from the future. Beta gives no consideration whatsoever to anything that could justify an assumption that the future path will in any way resemble the past. My bullishness on TJX is based on its execution of a business model that seems built for low risk, as reflected in relevant quantitative measures and confirmed by qualitative consideration of how it does business. My Smart Alpha Low Volatility Select – SP 500 model on Portfolio123 aims to find such stocks based on fundamentals I believe likely to result in lower volatility in the future.

On Target With Off-Price

We know what off-price retailing is. It’s about getting good brand-name merchandise at deeply discounted prices. This doesn’t happen because some retailers are greedy and others aren’t. Think of this phenomenon as being necessary to keep the retail channels flowing smoothly; to unload goods that result from manufacturer overruns, closeouts (i.e. product left over after a style is being discontinued), etc. If we didn’t have off-price retailing, we’d suffer from frequent shortages, periodic production shutdowns to clear excess inventory, and/or having current styles sold next to deeply discounted products from the last cycle (a good way to tarnish a brand). Think of off-price retailing as analogous to what market makers do when they provide liquidity in the stock market. They balance out supply and demand and keep things going, to the benefit of everybody. So while there may once have been a time when some might have seen off-price retailing as trashy, forget about that. This is an important part of retailing that’s here to stay.