Whether it’s low gas prices or an improving economy, something is pushing retail stocks to lead the market higher. For the year, the SPDR S&P Retail (ETF) (NYSEARCA:XRT) has more than doubled the gains of the S&P 500, and data suggests that retailers are among some of the best stocks to buy still, as more gains are on the way.
Typically, investors think of names like Target Corporation (NYSE:TGT), Wal-Mart Stores, Inc. (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST) when they look for retailing stocks, but there’s another layer of companies that we’ve found in the sector that typically goes unnoticed and is soundly beating the more mainstream retailers.
Our behavioral valuation model has identified a number of these so-called “tier two” retail stocks to buy that often slip under the investment radar, despite displaying their strong bullish cases.
So, let’s look at four stocks to buy that our models say should more than double the market’s returns over the next three months.
Retail Stocks to Buy: AutoZone, Inc. (AZO) and O’Reilly Automotive Inc (ORLY)
Click to Enlarge Do-it-yourselfers still rule a lot of the economic activity, especially in the area of automobile servicing. Don’t think so? Last year, IHS reported the average age of vehicles on the road was 11.4 years. One reason for that staggeringly high number: People would rather keep their cars and get more miles from them, typically maintaining them themselves.
Retail stocks to buy to benefit from this trend are auto-related retailers like AutoZone, Inc. (NYSE:AZO) & O’Reilly Automotive Inc (NASDAQ:ORLY). Year-to-date, both companies have outperformed the S&P 500 by more than triple. Looking back over the last 12 months, they’ve posted returns of 25% and 47%, respectively, and remain in technically strong trends.
Sentiment toward both companies reveals a strong “wall of worry” in place for AZO and ORLY to continue climbing. Both companies have exceedingly high short interest ratios, suggesting that we will still see short squeezes pressure prices higher. Both companies also boast low buy recommendations from the analyst community, suggesting that upgrades could drive prices even higher.
The powerful combination of fundamental and technical strength along with pessimistic sentiment will drive AZO and ORLY to double SPX returns.
Retail Stocks to Buy: Monro Muffler Brake Inc (MNRO)
Click to Enlarge Expanding on the AutoZone and O’Reilly story is another auto-related retailer, Monroe Muffler Brake Inc (NASDAQ:MNRO). This retail auto repair company has seen revenue grow an average of 11.5% each quarter over the last two years as the aging population of cars is being maintained by someone other than the dealerships.
MNRO stock has torn it up this year, gaining 16% since January. Despite the performance, the defiant short sellers are holding 10 times the average daily volume of the stock as short positions, setting up a short squeeze situation that will tack on even more gains.
The stock isn’t one of the analyst comunitty’s favorites, as only 46% rank it as a “buy.” This is starting to change though as SunTrust upgraded MNRO from a “hold” to a “buy” earlier this week. We’re expecting to see the rest of the analyst community wake up and start upgrading MNRO, providing a further catalyst for gains.
MNRO is trading at $67 now, and we expect this to be one of the best retail stocks to buy right now as it pushes toward $80 and outperforms the S&P 500 by more than double the S&P 500 over the next six months.
Retail Stocks to Buy: Supervalu Inc. (SVU)
Click to Enlarge A once-beaten name in the grocery retailers, Supervalu Inc. (NYSE:SVU) is making a comeback in a big way. SVU suffered years of fundamental setbacks that appear to have been righted as year-over-year revenue is now positive along with earnings surprises.
After a 10% correction in October, the shares have regained a technically strong trend with a price forecast topping $13. The analyst community, which hated this stock a year ago, is now issuing some big name upgrades. A few weeks ago, Deutsche Bank took shares from a “hold” to a “buy,” which was weeks after Goldman upgraded from “sell” to “neutral.”
Short sellers are still bearish on SVU shares as five times the daily volume is still betting on lower prices. As is usually the case, these bears will capitulate as the price inches higher. Over the short term, our models suggest a price of $12, followed by a year-end target of $15, which would represent a 32% gain from today’s price.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
