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Will Santa’s sleigh kick up a gear this Christmas and bring much-needed joy for retailers? Forecasters tip this festive trading season will be the best in some years, buoyed by higher confidence and employment. If they are right, some retail stocks look undervalued.

First, consider the bullish argument. The Westpac Melbourne Institute monthly consumer confidence survey, released this week, showed one of its highest readings since January 2014. The proportion of people expecting to spend more on Christmas gifts was well up on a year ago. The change of leadership in Canberra is boosting consumer sentiment.

Employment figures this week also strengthen the case for brisk Christmas trading. Total employment, up 58,600 in October, was the strongest monthly gain since March 2012 and the unemployment rate fell from 6.2 per cent in September to 5.9 per cent. If the job figures are to be believed, employment is growing faster than most economists expected. 

Property, too, should drive higher Christmas sales. Although auction clearance rates are cooling in Sydney, and to a lesser extent in Melbourne, gains in property prices over the past 12 months will make more home owners feel wealthier and spend more at Christmas.

Now consider the bearish view. The Reserve Bank’s decision not to cut interest rates in November and out-of-cycle rate rises by the banks because of higher capital requirements could weigh on sentiment. A December rate cut seems unlikely given the lack of data before it, meaning the next month will be February at the earliest – too late to help summer trading. The strong October jobs number lengthens the odds of a rate cut. 

Moreover, an expected moderation in the housing market, while needed, will weigh on housing-related sales. Lower property turnover, albeit of a higher base, means weaker demand for new electrical appliances, furnishing and other renovation items. Margin pressure in electronics, evident in Dick Smith Holdings’ profit downgrade in October, is another concern.

Then there is the sharemarket itself. Renewed weakness in the S&P/ASX 200 index this month has dampened hopes for the traditional end-of-year sharemarket rally. With popular stocks such as the big-four banks, Telstra Corporation and BHP Billiton well off their highs, share investors will fell less wealthy and less inclined to spend big at Christmas. 

On balance, I expect stronger Christmas trading this year, although not enough to suggest aggressive buying of retailers who depend heavily on festive trading. The bears’ main argument – a de facto monetary policy by the big banks – will have less effect on Christmas trading because interest rates are already so low.

Nothing beats consumers feeling more secure about their job, or having greater confidence in policymakers to boost the economy, to get cash registers ringing.

As for retail stocks, several column favourites are strongly leveraged to better Christmas trading. Premier Investments, for example, will do well as more is spent at its fast-growing stationery chain, Smiggle, and on its luxury Peter Alexander pyjamas.

Premier is not cheap. A median price target of $12.50 based on a consensus of 15 brokers who cover the stock suggests Premier is fully valued. Six brokers have a buy recommendation, six a hold and three a sell. Premier can beat market expectation as better local trading conditions boost its fashion chains and offshore growth in Smiggle drives sales.

Premier Investments

Source: Yahoo

The jewellery accessor chain, Lovisa Holdings, has eased slightly since I last wrote about it for The Bull in September. I noted then that Lovisa would “look a lot more interesting closer to $3” and it hit $2.79 later that month, before rallying to $3.23.

Like Premier, Lovisa has strong leverage to Christmas trading as parents and teenagers buy its cheap jewellery as gifts. Lovisa, too, has excellent growth prospects overseas and potential to open more stores than the market expects and expand in the northern hemisphere.

Lovisa Holdings

Source: Yahoo

Super Retail Group and RCG Corporation, analysed for The Bull in May, are this column’s other retail favourites. 

Super Retail, a provider of motoring accessories, boating and camping equipment, and sporting goods, has fallen slightly in the past six months. But it remains one the best-run retailers and has a strong position in its core market segments.

It should deliver stronger earnings growth in the next two years and a forecast price-earnings multiple of 15.8 times 2015-16 earnings is not overly demanding given its quality. A median share price of $10.60, using consensus estimates, suggests Super Retail is undervalued. 

Brokers on balance have a favourable view on Super Retail. Eight rate it a buy, three a hold and three a sell. The median price target looks about right, although Super Retail could nudge $11 in the next 12 months if Christmas trading is better than expected.

Super Retail Group

Source: Yahoo

Athletic footwear seller, RCG Corporation, has almost doubled to $1.39 in the past six months. It was $1.16 when I last covered it for The Bull in May. The acquisition of New Zealand company Accent Group put a rocket under its stock. 

I wrote of RCG and Super Retail in that column: “If RCG and Super Retail can make solid gains in a challenging retail climate, they can surely make new highs when retail conditions start to improve next year, and the market rotates into undervalued consumer discretionary stocks with leverage to an improving economy. Both retailers, due for a pause or share price pullback, have terrific long-term prospects.”

RCG Corp

Source: Yahoo

That view still holds. What has changed is signs that Christmas trading could bring a touch more cheer to retailers that heavily rely on the festive season. Trading conditions will still be tough, but the sight of Bad Santa leaving the building is enough to warrant greater investigation of retail stocks during this market correction.

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Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at Nov 12, 2015.