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3 Retail Stocks to Buy and Hold for 2016 and Beyond

While the broader market is finally starting to find some positive traction after a rough couple months, consumer and retail stocks have performed well throughout 2016. In fact, it’s been one bright spot in an otherwise volatile, unpredictable market wrenched in negative territory for 2016.

3 Retail Stocks to Buy and Hold for 2016 and BeyondThese three consumer and retail stocks currently in positive territory still look very attractive for the long term. Not only do each of these companies feature impressive growth, they’re cheap.

So let’s take a look and explore why Dollar Tree (DLTR), Kroger (KR) and Five Below (FIVE) are all stocks that you can buy and hold, market volatility be damned.

Dollar Tree, Inc. (DLTR)

Ever since Dollar Tree acquired Family Dollar, the name of the game has been to eliminate low margin, wasted shelf space. It has led to higher costs, with lower gross margins and a higher SG&A expense, but long term, these are moves that will pay dividends to DLTR stock owners.

If we remove Family Dollar from the equation, DLTR remains the bright retail spot that it has been since inception, with consistent same-store sales growth and the highest margins within the dollar store arena. DLTR had an operating margin of 12% in the year prior to its acquisition of Family Dollar.

The fact that DLTR has managed to become the most efficient discount retail business in the world, Walmart (WMT) and Target (TGT) included, despite having the clear disadvantage of a $1 price cap, speaks volume for the resolve and talent of management. Just think of what DLTR management can do over time in its newly acquired Family Dollar stores unencumbered by that $1 cap.

Yes, there are going to be some growing and structural pains associated with this transition, but long term, investors should take the bet that DLTR can create $2.5 billion of operating income from the collective $22 billion in revenue that this merger creates. If so, DLTR stock looks really good at just 7.5 times peak operating income.

The Kroger Co (KR)

Kroger has grown identical supermarket sales for 49 consecutive quarters, more than 12 years, and has reduced its operating expenses as a percentage of revenue for 11 consecutive years. In other words, KR keeps growing larger and becoming more efficient, year-after-year.

KR is the quintessential gold standard of retail, not only in grocery but also pharmacy, and is improving its stock in clothes. Yet, somehow KR had a “disappointing” quarter where sales grew 6.5% minus fuel sales and guided for same-store sales growth at a midpoint of 3% for the full-year.

The good news is that Wall Street’s mistake has given investors the opportunity to buy KR stock about 10% from its all-time high. With KR guiding that its per-share earnings could reach $2.28 and analysts forecasting an EPS of up to $2.5 next year, KR stock trades at just 17 times this year’s EPS and 15.5 times next year. That is quite cheap when you figure the growth and margin improvement at KR, and that its price-earnings topped 22 just last year.

While KR is unlikely to double in short-term stock value without a major buyback program, it is most certainly a stock worth buying and holding long term.

Five Below Inc (FIVE)

Five Below is kind of an under-the-radar stock, one that fits in the dollar store mold, and has adopted a DLTR-like approach with a “$5 and under” pricing model.

The model is working, with FIVE on pace for 22% revenue growth this last fiscal year, on top of 27% growth the year before, and is expected to grow 21.5% next year. As I explained in an article a couple years back, FIVE is actually growing at a pace that is very similar to DLTR in the late 1990s. With that pace, we all see what DLTR has become, and the near $20 billion market capitalization it supports.

Now, I am not suggesting that FIVE will become the next DLTR, but even if it grows at half the rate and matures to be half the size of DLTR, then it would ultimately become a great investment. Nonetheless, it is definitely worth buying and holding.

As of this writing, Brian Nichols owns stock in FIVE, KR and DLTR.

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