WASHINGTON (Reuters) — When you’re doing your holiday shopping, should you toss a few shares of retailers’ stocks into your basket this year?Maybe or maybe not. The sector, as measured by the Standard and Poor’s Retail Index, has already moved up about 16 percent since the end of August. But many analysts think retail sales still look bright, and that will pay off for these companies.

“Retailers may be jingling all the way to the bank,” the National Retail Federation said earlier this month when it released its holiday outlook. It expects 2006 holiday sales to best last year’s levels by about five percent.

Other analysts are even rosier. Carl Steidtmann, director of consumer business research at Deloitte Research, recently told reporters he expected a seven percent increase in non-auto holiday sales over last year. Lower gas prices and recent rounds of salary hikes should give consumers more cash to spend.

Another analyst, Dana Telsey, of the Telsey Advisory Group, says that stores are better managed, which should boost profits even further. Big retailers have invested big money in systems that enable them to optimise the amount of inventory they keep on hand. Too much and they have to cut prices; too little and they lose sales.

And retail firms have a lot of cash on hand, which they can invest in money-making acquisitions or other stock-share-bolstering activities like stock buybacks or dividend hikes.

But buying these companies isn’t a no-brainer. There’s already been a run-up in share prices. And the contracting housing market and another oil price spike could cause a reversal in fortune for retailers.

So here are some tips to help make your holiday investing profitable.

[bul] Don’t think of investments in retail companies as a long-term buy and hold plan. These stocks can be very volatile, and keeping the season in mind can help. Last year, the Standard and Poor’s retail stock index ended in almost exactly the same place it began. But between October 27 and December 31, it went up almost ten percent.

[bul] Do give stores the first quarter to pump up profits. The widespread use of gift cards is swelling sales in January and February as consumers come in to use them and end up buying more stuff. But by the middle of next year, consumer spending might abate and sales might slow, Steidtmann says.

[bul] Look for big-name companies. Telsey says retailers have cycles. They open stores until they get a certain market saturation, and then they make more money by revitalising the stores they have. They should redo their stores every five to six years to pull in the best sales.

Over the last several years, popular niche retailers have been opening new stores while big department and discount stores have been reinventing themselves. Look to profit from that this year as the niche stores reach saturation and have to start renovating.

[bul] Look at discounters that are bringing in luxury goods. Costco and Sam’s Club are selling fine jewellery, gourmet chocolates, fancy pool tables and the like. Old Navy is selling cashmere. Customers like to buy nice things at a good price, so those kinds of stores might do well this year.

And Telsey says stores like American Eagle and Urban Outfitters, which were particularly popular with young adults who are now older, could prove promising if they can keep their ageing customers happy.Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern[AT]aol.com