Retail sales rose in May, surprising economists who were expecting a decline. Chris Versace, Chief Investment Officer at Tematica Research, tells Yahoo Finance Live that consumers are being more selective with their spending, and, as a result, investors need to be more selective about the companies they choose to invest in.

Video Transcript

JULIE HYMAN: --and take it to what's going on with retail because it seems inflation has not fully stopped consumers from spending. Purchases at retail stores and restaurants unexpectedly rising in May up 3/10% last month to about $686 billion. That's according to Census Bureau data. Chris Versace is still with us, Tematica Research chief investment officer.

And I guess this kind of shows what we're talking about, the demand is still there. One thing that really stuck out to me that is just bizarre to me in this report, you exclude motor vehicles and gas stations, right? You get a 4/10% increase. You know where the biggest increase came from of all the categories?

CHRIS VERSACE: I'm going to guess food services.

JULIE HYMAN: It's not what you would guess, right? Food service was up 4/10 of 1%. Building materials, garden equipment, and supplies, up 2.2%. Like what the what? I don't know what--

CHRIS VERSACE: Oh yeah.

JULIE HYMAN: I don't really understand where that came from.

CHRIS VERSACE: I think some of that is seasonal in nature.

JULIE HYMAN: I guess so.

CHRIS VERSACE: And if people are concerned about the housing market with the tight supply, what are you going to do? You're going to do some repair or remodel. But when you compare that against what Home Depot had to say. Look, where I live, did people go crazy doing projects around the house coming out of the pandemic? Yes. So I wasn't surprised with what Home Depot had to say because you can only do so much. You can only go so far. But that number is very surprising.

But I will say, though, that when I look at the retail sales numbers, I don't necessarily look at month-over-month. I always look year-over-year. Because when we think about how companies report, the earnings comparisons we look at, more often than not, it's year-over-year. And there, the headline was up 1.6% year-over-year. So when we talk about our inflation conversation--

JULIE HYMAN: And that category fell year-over-year, I should mention.

CHRIS VERSACE: Yeah. Yeah. And when we talk about retail sales versus inflation, wow, people are paying more for less, right? And then you strip out everything else and you look at the pure retail number, only up 0.7% year-over-year. So again, people are paying more, getting less.

AKIKO FUJITA: So it is about the higher prices. But the thing, also, it feels like there is still kind of this divide between where sentiment is versus where the spending is actually happening.

CHRIS VERSACE: More selective, yeah.

AKIKO FUJITA: How do we look at that divide?

CHRIS VERSACE: You know, as an investor, you really got to pick your spots, right? So like when we pore over the data like department store sales, down 3 and 1/2% year-over-year. So we know that people may not be either shopping there or that they may not be buying clothing. And that kind of fits with the narrative that we've had, that people are eating out, people are traveling. You look at the TSA data, people are traveling going gangbusters. United just came out recently and kind of attested to that.

And you look at food service, up 8% year-over-year, still strong. So people are choosing and being selective where they spend. But then you flip it around, when you have a company like Kroger that comes out and said, oh, we're seeing a lot of our higher end shoppers going towards store brands. Again, more signs of being selective.

AKIKO FUJITA: It's about trade-downs in the everyday purchases, but not necessarily in the big purchases.

CHRIS VERSACE: Buying what I want and saving where I can.

JULIE HYMAN: So take that, then put this together between the Fed discussion and the retail sales discussion, and tell us what it means for my money, you know, and what people should be buying right now.

CHRIS VERSACE: So kind of the way we look at it, most consumers, like you were saying, are being more selective. Where are they going to shop so they can stretch their dollars? That's going to be your Kroger's, your Walmart's, your Costcos. And I've liked Costco for quite some time, in part, because it has a very differentiated business model. It's membership-driven.

And they derive, unlike Walmart or some other retailers out there, a disproportionate amount of their income from membership revenue. And they're continuing to grow their warehouse footprint. That means, oh, more members, more membership income. So that's one that I absolutely like.

AKIKO FUJITA: Any other names in here? You know, it feels like it has been consistently about the value play. If we're talking about those everyday items, Costco is one we heard that from. The other big name retailers like a Walmart as well as a Target, I mean, how do you feel about some of those names in light of elevated prices?

CHRIS VERSACE: So Walmart, absolutely. I mean, one of the things that stands apart with Walmart is it's actually the largest grocery chain in the US. So people are coming in more frequently. So they can kind of lean into that, the Walmart. In terms of taking advantage of their everyday low pricing, Target I think has a tougher chance.

To me, Target's kind of like lost in the middle a little bit. Because you've got your dollar stores, right and you've got your Costcos, BJ's, and the like. And then Target kind of over here. So it's not-- I think they're going to have a tougher time.

JULIE HYMAN: I want to ask about another area of the market. Not retail, but sort of related to these bigger themes we're talking about, and that's technology because that is the area that has done so consistently well, the large cap technology. If we're looking at a Fed that may be raising once, maybe twice again by year-end in the face of this strong consumer spending among other factors, what does that imply for tech stocks?

CHRIS VERSACE: So I think we've got to step back a second. And I'm sure you guys have talked about this, but it bears repeating. When you look at how the technology market has exploded this year, really outperforming for the NASDAQ, it's only a handful of stocks that are really doing it, right?

And it's really driven by AI-related headlines. So whether it's Microsoft, Google, to some extent Apple, Amazon, or Nvidia, of course, all AI. And every day, we continue to hear more news about AI. Even this morning, Google announcing some AI tool that allows people to virtually try on clothing.

Kind of interesting, but just the notion that we're continuing to see more of this. But I think your point is well taken about higher rates, because technology stocks, typically, they're categorized, particularly small, medium-sized ones, borrowing. So their incremental cost goes higher to do that. So the question has become, OK, now what am I going to pay for this valuation?

But at the same time too, just skirting back to the consumer, we've, what? A trillion dollars in credit card debt with rates according to the New York Fed that are the APR rates that are the highest they've ever seen since '94? And they're going to go higher? That's another headwind for the consumer too.

AKIKO FUJITA: Are you buying into the AI boom?

CHRIS VERSACE: Indirectly. So in the actual Alerts Plus portfolio that I manage for the street, we have a position in Marvell. So the way that we kind of think about it-- Marvell is a digital infrastructure play-- if we think about AI, mixed reality, augmented reality, and all these other things that are driving this virtuous circle of content creation consumption, AI is just another factor that's going to drive network capacity higher, fostering upgrades to the network.