‘Tis the Season for These 4 Retail Stocks

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For much of the year, you’ve been hearing financial pundits urging you to avoid retail stocks at all costs.

retail-stocks-to-buyYou can’t blame them for their negative bias, with the SPDR S&P Retail Index (XRT) ETF up a mere 3.9% year to date — underperforming the S&P 500 by about six percentage points. However, economic conditions are favoring the consumer, evidenced by improving sentiment and gas prices holding below the psychologically sensitive $3 per gallon threshold around the country.

As a result, consumers are cheery and have more discretionary dollars in their pockets to spend, which the retail industry is prepared to capture, illustrated by the growing trend of open doors on Turkey day. Not to mention the fact that with the holidays upon us, retailers in a few short months will be reporting their single-best quarter of the year.

Of course, all the upcoming exuberance doesn’t mean you should choose blindly, as there are still a fair share of retail stocks that have major issues to work out. However, be careful not to miss the forest from the trees, as there are a handful of attractive retail stocks to buy now.

Retail Stocks to Buy: Best Buy (BBY)

retail-stocks-to-buyWhile this may seem like a risky selection, particularly to open with, don’t turn your attention away from electronics retailer Best Buy (BBY). Sure, there have been some bumps in the road, not the least of which has been a 12% decline in BBY stock year to date.

However, if you look closely, you’ll see that in the most recent quarter, consumer electronics such as televisions were the highlight of the performance. Consumer electronics comprise 65% of the retailer’s total U.S. sales, positioning the company to benefit from trends like the ultra high-definition, high-pixel 4K TV, which has been the hottest new trend in home viewing for 2014.

NPD Group, for instance, is predicting that the 4K TV will be the item du jour this holiday season, expecting it to surpass even the most optimistic of sales predictions.

You have to be a visionary to invest in Best Buy stock. The electronics retailer in its most recent quarter saw its brick-and-mortar foot traffic decline, prompting a 2.7% fall in comparable sales. However, it has been responding to the shift in consumer preferences toward e-commerce and investing in its online platform, the results of which included a 22% jump in comparable online sales last quarter.

This holiday season could be the start of something good for Best Buy and for your portfolio.

Retail Stocks to Buy — Target (TGT)

retail-stocks-to-buyWhat a difference a year can make. Last year at this time, Target (TGT) took a slide when the first in a series of industry data breaches hit this big-box retailer. Target stock has added 22% from its 52-week lows, as its turnaround efforts have resonated with investors.

While the retailer spent much of the past year changing course, including the introduction of a new chief executive, Target in many ways is sticking to its roots.

To be clear, Target isn’t entirely out of the woods yet. The company is still repairing its botched rollout in Canada where it is expanding the number of its stock-keeping units in this fourth quarter, which could attract more shoppers. But it’s also featuring some exclusive items this holiday season, a tactic that it’s known for, including popular brands ranging from TOMS apparel to Nate Berkus home decor.

Merchandising and promotions will be key, as Target continues to face fierce competition on all fronts, from Walmart (WMT) to e-commerce sensations Alibaba Group (BABA) and Amazon (AMZN). However, this year Target is coming out swinging, evidenced by its plans to offer shoppers free shipping for Internet orders through Dec. 20, a move directed squarely at the Amazon Prime service.

There are other tailwinds to lift the stock, not the least of which include low comps from last year (as a result of the data breach) that should make for favorable fourth-quarter comparisons. Shareholder value remains a priority, evidenced by the generous 3.1% dividend yield that’s a function of a 71% payout ratio.

So, while TGT stock might not be the most obvious buy among retail stocks, there’s more potential that most investors are giving it credit for.

Retail Stocks to Buy — TJX Companies (TJX)

retail-stocks-to-buyYou wouldn’t know it by looking at the flat performance in the stock this year, but TJX Companies (TJX) is on a roll. The discount retailer has been able to separate itself from the pack, evidenced by its recently lifted fiscal 2015 earnings guidance coupled with a 6% sales gain the off-price retailer experienced in September during the back-to-school season.

When you consider the effects that the lower gas prices will have on consumers in the coming months, off-price retailers like TJX should come to mind. The discretionary dollars of cash-strapped shoppers are closely tied to the cost of filling up the tank. Consequently, any savings from cheap gas is likely to be directed toward holiday shopping at discount retailers, which is where TJX shines.

The stock, which is trading 3% below its median price target of $66, is trading at a competitive earnings multiple of about 20, and it looks particularly attractive next to peers that are lowering their financial forecasts.

Retail Stocks to Buy — Macy’s (M)

retail-stocks-to-buyAt the Macy’s (M) Thanksgiving Day Parade, the children wait with bated breath for the final float of the day that carries Santa Clause. Macy’s stock is kind of like that float, as it enters at the end of the parade of stocks and it comes bearing gifts, not the least of which is an inexpensive valuation.

Macy’s stock is trading at just 13 times next year’s earnings. Yet this retailer is expected to grow earnings by double digits both this year and next, including growth of up to 10% in 2014 and approximately 15% in 2015.

With M stock — which is up nearly 14% year-to-date, beating the broader market — it really depends on whether you choose to see the glass half full or half empty.

Steady profit growth has been met with sales that have fallen short, evidenced by the 30% bottom-line growth jaded by declines in total sales and comparable-store sales in the third quarter. Investors seemed to favor the optimistic scenario, evidenced by the gains the stock experienced following the earnings report, suggesting the headwinds have already been priced in.

Anecdotally, Macy’s has something working in its favor, and that’s the Polar Vortex that’s expected to sweep across the nation in the coming days if not weeks. These colder-than-average temperatures are likely to draw customers into retailers to purchase winter apparel, including sweaters and warm coats, which plays into the hands of retailers like Macy’s.

With profit growth, a goal-oriented management team and an attractive valuation — sales pressure not withstanding — the pros outweigh the cons for Macy’s, making it a solid buy among retail stocks.

As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/retail-stocks-to-buy/.

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