Long Term Picture for Retailers Looks Murky

Shares of Staples (SPLS) and Office Depot (ODP) surged on Tuesday after a Credit Suisse analyst suggested that the two office supply retailers merge in order to better compete with big-name companies like Amazon (AMZN). Investors remained bullish on the news on Wednesday morning as the two stocks continued to climb.

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Times Are Tough for Retailers

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We’ve seen dozens of M&A deals so far in 2014 as companies seek to become larger and stronger in a tough market. In July, discount retailers Family Dollar (FDO) and Dollar Tree (DLTR) announced a planned merger to better compete with big box retailers like Wal-Mart (WMT). In August, the deal became a bidding war when Dollar General (DG) jumped into the mix.

The retail world is becoming increasingly difficult for companies. Staples has announced layoffs and plans to close underperforming stores. Office Depot, who merged with OfficeMax less than a year ago, has been on the edge of penny stock status as it closes more stores and reports losses.

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Mutual Fund Investors Beware

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Many companies in the retail industry have been troubled by competition and a changing retail environment, making these investments risky for mutual fund investors.

As some retail companies fight to stay alive, mutual fund investors that are exposed to these holdings should remain cautious.

For a conservative investor, finding mutual funds that hold companies with a solid outlook may be the way to go.

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The Bottom Line

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Going forward, mutual fund investors that maintain exposure to retailers should pay close attention to market trends and events. Although these M&A deals have spiked the stock prices for several of the companies involved, the industry remains weak.