Chip Reed runs one of the top mutual funds of 2019, and discount retailers TJX Cos. and Ross Stores were big winners for him. Reed says those two chains are actually benefiting from the turmoil in the retail industry because it’s doing more damage to their competitors.Both stocks have made enormous gains in the past decade, and Reed expects them to keep outperforming whether or not there’s a recession — although a downturn would also benefit them. Click here for more BI Prime stories.How do you invest in an industry that’s going through an “apocalypse?”A lot of people would probably say you shouldn’t do it at all. On the other hand, Chip Reed, the manager of one of the best mutual funds on Wall Street this year, is making a couple of big bets on the tumult.Reed’s Eaton Vance Atlanta Capital Select Equity Fund climbed 16.2% over the 12 months that ended on September 30, which was the third-best among large-cap stock funds in that time. This year the fund has brought in a total return of 37.2%.And 10% of his portfolio is now devoted to two retailers, as TJX Cos. is his second-largest position and Ross Stores is another significant holding.In an exclusive interview with Business Insider, Reed said the rise of online retailers and the trends that are causing thousands of stores around the country to close are helping those two companies in some subtle ways.”That’s put pressure on the traditional retail channel. Because sales have slowed there, they have excess inventory,” he said. “They sell it to people like TJ Maxx and Ross.”That means that TJX and Ross can benefit and expand their profit margins as a result of Amazon and other rivals instead of seeing their prices drop and margins shrink.That’s part of Reed’s driving focus on earnings and quality above all other attributes. That helped the Select Equity fund outperform the market during its turbulent phases in the last year, and Reed says it also explains why he believes so strongly in these discount retailers at a time investors are rapidly getting more optimistic about the economy.As a result, he’s been adding to his investments in Ross and TJX through the last year even as the two companies have made astounding gains in the past decade: TJX is up 556% and Ross has soared 973%.The reason why revolves around the resilience he expects them to exhibit, even in the event of an industry-wide meltdown. Reed thinks both TJX and Ross can weather a storm of any severity, and are poised to outperform regardless of outcome.”We tend not to have a view on the economy or the market necessarily,” he said. “For us to be successful, we don’t have to get our economic forecast absolutely right. Our companies can operate in any environment, in good times and in bad times.”That said, he considers the economy another source of possible upside for these companies because it will alter the way people spend their money.”You’re still going to have people that want to shop. And so what they do is they tend to trade down,” he said. “They’ll go from the department store to the discounter, and that’s where TJ Maxx and Ross play.”
Retail sector investing, stock-picking advice from top-ranked manager – Business Insider
