by Jeff Reeves | May 29, 2014 10:35 am
This has been a rough year for many retail stocks.
First, 2014 got off on the wrong foot as cold wintry weather held back consumer spending. But while the spring thaw seemed to lift numbers, investors were socked with an ugly April retail sales eked out an anemic 0.1% growth rate, grossly missing expectations.
We also saw a number of high-profile earnings misses from retailers — including the world’s biggest retailer Walmart (WMT), which saw its first-quarter net income fall in its recent earnings report and forecast Q2 profit will come in below Wall Street expectations.
But if you’re ready to give up on retail stocks, don’t quit just yet. There may be some bargain buys in the discount rack, if you know where to look.
Here are three underpriced retail stocks worth checking out even amid trouble in the rest of the sector:
Staples (SPLS) stock has crashed 27% year-to-date in 2014, and is off 50% since the start of 2010. But a big dividend yield and overly negative sentiment could signal a bargain in the office supply store right now.
It’s not hard to understand why Staples has suffered. For starters, revenue has been struggling with FY2014 sales down about 5% over FY2013 numbers, and the company just announced it would be closing 225 locations.
However, there are reasons to like SPLS stock amid the mayhem.
Staples has a decent online sales engine; Staples.com is the No. 2 e-commerce player in the U.S., according to Internet Retailer data. Nearly half of the company’s sales are generated online — so while stores are closing, that might not mean all that much of a sales hit if SPLS pivots correctly.
Also, unlike other troubled retailers, Staples is actually quite profitable. And while those profits don’t burn down the house, they are big enough to support a hefty 4.2% dividend yield. Furthermore, that annual dividend of 48 cents per share annually is up about 118% from 22 cents per share annually back in 2006, just eight short years ago. The icing on the cake is that the dividend is 48% of earnings right now, meaning it is sustainable and still ripe for possible increases.
Staples has been battered by negative sentiment around weak business spending, weak retail results, the pressure of e-commerce and a host of other factors. The company now has a forward P/E of less than 12, business is stable, even if it’s not growing and the dividend is juicy. The sellers seem to have already sold … so why not take a flier on this unloved stock?
Target (TGT), like Staples, has its share of warts. The company has been battered by billion-dollar losses in its Canada unit, and the fallout from recent security issues and the loss of customer data. But long-term investors should take comfort in the great track record that Target has in protecting shareholder value through any market environment.
Target has raised its dividend every year since 1967 — a run of 47 years and counting. Also, it has grown its dividend by an annual rate of 20% for the past 10 years. And going back 20 years, it’s a not-too-shabby 13%. TGT also been committed to stock buybacks over the last decade or so. Since 2002, Target has reduced its shares outstanding from 1.3 billion to just 638 million as of its last reporting. That’s a reduction of 44% in TGT stock.
Target has been beaten down and nobody likes it right now, meaning there could be long-term value for income investors willing to buy on a dip and hold through future dividend increases.
When you look at the fundamentals, there is a good case for a value investment despite the recent spate of bad headlines. Target stock is priced at just 12 times forward earnings and 0.5 times sales. Considering the much higher valuations across the market and even elsewhere in retail, that means at worst you are buying at a fair price instead of chasing an earnings multiple that won’t last.
Keeping with the theme of undervalued retailers, Amazon (AMZN) pops up as well.
Despite its long-term track record of outperformance, AMZN has hit a serious wall in 2014 as momentum has crumbled. Shares of AMZN stock are down more than 20% year-to-date, and investors are finally showing serious concerns about whether Amazon is committed to growing profits instead of simply growing sales.
But the reality is that simply growing sales is an impressive feat in this troublesome market.
Amazon has grown its revenue from $34.2 billion in fiscal 2010 to a projected $90.8 billion this year — an amazing 165% growth rate.
Furthermore, Standard & Poor’s analysts project $1.09 in earnings per share for fiscal 2014, and an even more impressive $4.24 projected for fiscal 2015. That still gives AMZN stock a pricey forward P/E ratio of more than 70, but shows the company — and Wall Street — expects significant improvement to the bottom line going forward, even if profits weren’t there in the past.
If you’re a longer-term investor, there is a lot of potential in Amazon stock. I’d feel comfortable buying this high-growth play at or a bit below $300 per share after the correction, with the expectation that growth materializes as planned — or even better than expected.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.
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