As we head into the final month of summer, investors are dusting the beach sand off of their suits and splurging in one of retail’s biggest seasons: back-to-school shopping.
While school bells won’t ring for another few weeks — and the retail numbers aren’t expected to be spectacular — there are certain opportunities within the retail sector that have already been earning A’s from the Street.
Retailers are attractive in part because strong U.S. job creation means more money for consumers to spend, even with only modest wage gains. The stronger dollar helps retailers to purchase foreign goods on the cheap, and the low interest rates have also proven beneficial.
And in spite of the National Retail Federation’s lowered 2015 retail sales forecast, analysts expect numbers to steadily increase throughout the remainder of the year.
I’ve made sure my subscribers have profited from some of the best opportunities in the retail and consumer industry. For example, we’ve recently sold several winners out of my GameChangers newsletter, including Fiesta Restaurant Group (FRGI), for 25% profits, VCA Inc (WOOF), 12% and Wayfair (W), at 10% profits.
With those larger macro factors playing a supporting role, I continue to see opportunities.
Shopping for Retail
On one hand, there are attractive growth stocks in retail. To find those, I focus on companies with specific price-driving catalysts, successful growth records and price-to-earnings ratios that could expand as investors bid up stocks on earnings beats.
On the other hand, I also like to select retail stocks from a value perspective. Let me tell you about two that offer a combination of attractive valuation, a lack of exposure to global economic weakness and little currency headwind.
Kohl’s (KSS) had a rough start to the year with lackluster first-quarter earnings, but management is working hard to maintain a consistent record of positive growth.
The most attractive quality of KSS is its valuation relative to free cash flow: around $1 billion a year over the last couple years, which works out to a free cash flow yield of just more than 8% with its $12 billion market cap.
A new aggressive merchandising plan — referred to as the “Greatness Agenda” — has also helped push earnings back up to $4.24 per share, making the current $4.53 EPS estimates for January 2016 all the more feasible.
Dillard’s (DDS) — another enormous U.S. fashion retailer — tells a similar, albeit more dramatic story.
After a middling first quarter, DDS reported earnings of $2.66 per share (12 cents below estimates), as well as a revenue dip of 1%. As a result, DDS stock dropped like an anchor; from $142 in April to its current sub-$100 price.
However, Dillard’s has a long-standing history of strong earnings and significant cash flow, putting it in a good position for a rebound from bargain levels at just over 11 times its adjusted 2016 EPS estimates. I used the post-earnings pullback to recommend the company in my Value Authority newsletter at the end of July, and I anticipate the fall season should treat DDS kindly.
Bottom Line
To add a cherry on top of this retail pie, stocks like KSS and DDS are, for the most part, immune to the wishy-washy global economy.
With a solid trend in place, I think retail will continue to generate good opportunities as we leave the warm summer months behind and move into the fourth quarter.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
