3 Smartest Ways to Own Retail Stocks

by Will Ashworth | December 19, 2013 3:01 pm

With holiday shopping in full tilt, retail stocks are very much in the headlines. Many are getting slaughtered by a shortened holiday season that stuck in a heavily promotional selling environment. That said, there are some retail stocks worth owning at the moment.

retail-stocks[1]S&P Capital IQ produced a report[2] in November that examines how often the 12 retail-related sub-sectors of the S&P 500 have beaten the overall index on a monthly basis since 1990. Three of the sub-sectors beat the index 60% of the time or more in at least six of 12 months in any given year, making stocks from these groups the ones to lean on.

Here are the 3 smartest ways to own retail stocks.

Compare Brokers[3]

Automotive Retail

retail-stocks-KMX[4]Investors have a choice between two stocks — CarMax (KMX[5]) and AutoNation (AN[6]) — who operate in different markets. KMX is the country’s largest retailer of used cars with 126 used car superstores in 63 markets. AN is America’s largest automotive retailer with 267 new vehicle franchises in 15 states.

So, do you go for new or used? That age-old question of car buying also applies when it comes to stocks. While the past doesn’t dictate the future, KMX stock has achieved a total return year-to-date through December 17 of 38% — 13 percentage points higher than AN. In fact, it has outperformed AN in six of the last 11 years, and KMX has beaten AN over the past 15 years by 15 percentage points on an annualized basis.

As people start replacing their old clunkers (the average age of cars on the road is around 11 years), Auto Nation is bound to benefit given its position within the new car marketplace. However, with cars getting so expensive, consumers will likely look to late-model used cars to fill the breech. Still, even though AN gets a commission for placing a client with one of its financial institution partners, it doesn’t get 5% interest annually for the length of the car loan. KMX does.

KMX better controls the buyer experience, keeping financing in-house. That makes KMX the better stock to own.

Compare Brokers[3]

Internet Retail

retail-stocks-EBAY[7]This is a two-horse race between Amazon (AMZN[8]) and eBay (EBAY[9]). That’s no easy choice as they’re both excellent companies.

Both sell online goods, include through third-party sellers, and are huge companies — $85 billion in combined revenue and $245 billion in combined market cap. But that’s where they diverge.

Venture capital investor Chris Dixon wrote a good piece[10] on his blog (recommended reading) in 2012 that compares the two companies and how their e-commerce business models are different.

One of the biggest differences between the two companies is profitability. Amazon’s Jeff Bezos doesn’t consider short-term profits when making business decisions, focusing on the big picture instead. If you watched 60 Minutes recently, you saw him explaining how it is currently in the process of figuring out how to ship products that weigh less than five pounds with automated drones[11]. Bezos is obsessed with logistics because he knows these things factor into the customer experience. Through large volumes and market share penetration, Amazon will win the e-commerce battle, if it already hasn’t.

EBAY, on the other hand, expect to generate $4 billion in free cash flow in 2014. Amazon will be lucky to generate any. Yet EBAY stock has barely budged in 2013, up 3% year-to-date through December 17 compared to 55% for AMZN. Investors don’t seem nearly as fascinated by its growth story, but they should be.

Over the next two years, I think there’s money to be made investing in eBay because its stock is cheap relative to its peers. Long-term, however, I think you should have both in your portfolio.

Compare Brokers[3]

Apparel Retail

retail-stocks-GPS[12]When it comes to apparel retail stocks in the S&P 500, investors have stocks to choose from. Although tempted by Nordstrom (JWN[13]) because of its impending expansion into Canada, I view Gap (GPS[14]) as the best pick — its stock has done okay in 2013, but is still the cheapest of the group in terms of valuation. CEO Glenn Murphy has proven he knows how to operate in retail.

November sales are in, and although they were nothing to write home about — overall comps were up 2% year-over-year, with Old Navy generating a 3% same-store sales increase compared to 1% the year before — they were better than many of the retailers who operate primarily in malls. Gap has seen a lot of ups and downs in the past decade so this isn’t going to faze them. Besides, analysts were only expecting an increase of 0.7%, so really it performed better than expected.

Several opportunities exist for GPS as it enters 2014, the biggest being in Asia with Gap China and Old Navy Japan. Beyond that, opening more Athleta stores and taking the fight to Lululemon (LULU[15]) are the big priorities, especially since LULU appears to have fallen off the growth wagon[16].

Since Glenn Murphy took over as CEO in July 2007, GPS stock is up 155% compared to 38% for the SPDR S&P 500 (SPY[17]). Unlike Paul Pressler, Murphy has been the tonic GAP needed to get its ship righted. Nonetheless, investors aren’t giving it enough credit. Its enterprise value is just 6.8 times EBITDA, compared to 8 times EBITDA for its index peers.

With some good results (they don’t even have to be great) the next 2-3 quarters, I could see a $50 stock price by the end of 2014. GPS stock is a value play all the way.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

  1. [Image]: https://investorplace.com/wp-content/uploads/2013/07/retailshopping185.jpg
  2. report: http://www.theglobeandmail.com/globe-investor/investment-ideas/research-reports/article15375641.ece/BINARY/2013-1111%20Straw%20Hats.pdf
  3. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  4. [Image]: https://investorplace.com/wp-content/uploads/2013/12/Carmax-185.jpg
  5. KMX: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMX
  6. AN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AN
  7. [Image]: https://investorplace.com/wp-content/uploads/2012/09/eBayNew185.jpg
  8. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  9. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY
  10. good piece: http://cdixon.org/2012/02/13/ebay-vs-amazon-decentralized-vs-centralized-e-commerce/
  11. automated drones: http://www.amazon.com/b?node=8037720011
  12. [Image]: https://investorplace.com/wp-content/uploads/2010/10/GAPLogo.jpg
  13. JWN: http://studio-5.financialcontent.com/investplace/quote?Symbol=JWN
  14. GPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPS
  15. LULU: http://studio-5.financialcontent.com/investplace/quote?Symbol=LULU
  16. growth wagon: https://investorplace.com/2013/12/lululemon-stock-lulu/
  17. SPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPY

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