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Buy This Discount Retailer and Dump the Rest

Poor fundamentals are the norm almost everywhere but Costco

   

One would think that with the economy still struggling and job security still high on consumers’ list of concerns, that discount retailers would be seeing robust growth.

And one would be wrong, as counterintuitive as that might seem.

People aren’t shopping exclusively for bargains right now … instead, it appears they’ve simply stopped shopping altogether. Revenues and earnings for discount retailers have been weak, and the fundamentals for most of the group are abysmal. Some investors and analysts think they might rebound in the second half of the year, but I would rather wait for the fundamental improvements to show up in Portfolio Grader.

The majority of discount retailers currently have “sell” or “strong sell” rankings in Portfolio Grader and should be avoided by investors. Dollar Tree (DLTR) and Dollar General (DG) are rated sell by the stock picking tool as are TJX Cos. (TJX) and Ross Stores (ROST).

Big Lots (BIG) has the worst fundamentals in the group right now and is rated a “strong sell” by Portfolio Grader.

The biggest surprise to many analysts and other market observers is the poor performance of the discount retailing “Big Two.’ Both Target (TGT) and Walmart (WMT) are rated “D” by Portfolio Grader, specifically amid their struggles to grow revenues.

Target is reporting Wednesday, and investors are hoping the chain will give some clue as to how its back-to-school shopping season is faring this year. Analysts don’t seem to expect much improvement, though, as earnings estimates for the quarter and full-year 2013 have been declining in recent months. Portfolio Grader is bearish, too, recently downgrading TGT to a “sell.” Walmart sits in the same boat, so both stocks should be avoided until the fundamentals improve.

Business is a little better for the large warehouse-style shopping chains. One of the discount retailers that is doing well is Costco (COST). The warehouse membership store has 618 locations, of which 447 are in the United States. Customers are spending money at Costco to load up on basic food and other supplies in bulk. COST is one of the few retailers of any stripe with strong revenue and earnings growth during the past five years, and it recently reported a strong quarter with an 18% year-over-year improvement in earnings. Costco stock was upgraded to a “B” two weeks ago, signifying a “buy” rating.

Consumers appear to be buying only what they have to buy and holding back on other purchases — and are even avoiding the lowest-priced of the low where they can.

With the exception of Costco, the low-end retailers should be avoided or sold for now.

Louis Navellier is the editor of Blue Chip Growth.


Article printed from InvestorPlace Media, http://investorplace.com/2013/08/discount-retailers/.

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