Over the past several weeks, estimates for 2018 holiday shopping spend have rolled in, and they’ve been largely bullish.
The National Retail Federation believes holiday sales will rise between 4.3% and 4.8% this year, markedly higher than the five year average holiday increase of 3.9%. Moody’s thinks holiday sales will rise by 5% to 6%, also above the long term average. Adobe (NASDAQ:ADBE) projects 14.8% online retail sales growth this holiday season, which is above both the 2017 and 2016 growth rates. Meanwhile, eMarketer thinks U.S. holiday retail sales will rise by 6%, the biggest growth rate since 2011.
By and large, the read going into the 2018 holiday season is largely bullish for retail stocks, and it should be. Retail sales growth is robust and above trend. Consumer confidence is at decade-high levels. Stocks, while volatile lately, are still near all-time highs. Interest rates, while rising, are still largely accommodating. Wages are rising meaningfully for the first time in a long while. U.S. economic growth is as big as its been in recent memory. The consumer savings rate is still high. Plus, you have major bankruptcies from Toys R Us and Sears which mean more market share is up for grabs to still operational retailers.
Overall, all signs point to “GO” for retail stocks this holiday season.
But, because of the October stock market rout, most retail stocks aren’t priced for this upward end-of-year catalyst. As such, the buying opportunity in retail stocks ahead of the holidays seems compelling.
With that in mind, here are ten retail stocks which every investor should have on their holiday shopping list.
Retail Stocks to Buy Ahead of the Holidays: Amazon (AMZN)
At the front of this list is e-commerce giant Amazon (NASDAQ:AMZN).
There are concerns about Amazon’s e-commerce business slowing down. This is undeniably happening. E-commerce growth rates at Amazon have slowed meaningfully over the past few quarters, and at up just 15% last quarter, Amazon’s e-commerce business is growing much more slowly than peers.
But, that is to be expected. After all, Amazon’s e-commerce business is far larger than everyone else’s e-commerce business. In the big picture, Amazon still owns about 50% of the U.S. e-commerce market, and with digital sales expected to grow more this year than they have in prior years, Amazon is in a favorable position to win big this holiday season.
AMZN stock isn’t priced for this catalyst. It has dropped into bear market territory recently, and now trades at its lowest levels in several months. That doesn’t line up with still strengthening fundamentals supporting the business. As such, expect strong holiday numbers to provide a nice end-of-year lift to AMZN stock.
Retail Stocks to Buy Ahead of the Holidays: Walmart (WMT)
Right behind Amazon on this list is Amazon’s biggest competitor and the 400-pound elephant in the retail world: Walmart (NYSE:WMT).
The narrative that dominated retail for the better part of this decade was the “Amazonification” and inevitable apocalypse of retail. Walmart was thrust into that narrative was one of the companies losing big to Amazon. For several years, this was true, and Walmart’s sales and WMT stock dropped.
But, that narrative has changed course dramatically over the past several years. Walmart’s e-commerce business has started to pick-up steam, and even the physical business is stabilizing. Now, Walmart is reporting its best comparable sales growth in a decade, and the e-commerce business is growing more than twice as fast as Amazon’s e-commerce business (40% at Walmart, versus 15% at Amazon).
This accelerating operational — and specifically e-commerce — momentum into the end of the year puts Walmart in a favorable position to win big as the consumer opens his/her wallet this holiday season. Walmart’s holiday numbers, boosted by a strong consumer and a broader-than-ever-before omni-channel offering, will be quite good. Those good numbers will power WMT stock back to and potentially above prior all-time highs.
Retail Stocks to Buy Ahead of the Holidays: Target (TGT)
In the retail world, consumers and investors often think of the Big 3: Amazon, Walmart, and Target (NYSE:TGT).
Up until very recently, Target was considered the weak link in that Big 3 because of its lack of a burgeoning e-commerce business. Whereas Walmart started successfully executing on an e-commerce led turnaround in early 2017, Target didn’t begin its big e-commerce turnaround until much later in late 2017.
But, Target is now arguably the growth leader in this retail Big 3. Last quarter, Amazon’s e-commerce revenue growth rate was 15%. Walmart’s was 40%. Target? 41%. Not only that, but Target’s physical retail business is also stabilizing, and the company is reporting decade-best comparable sales and traffic growth.
All of these positive developments have sparked a rally in TGT stock. Over the past year, TGT stock is up nearly 50%. But, the valuation remains reasonable at just 16x forward earnings. Thus, further positive developments should sustain the rally in TGT stock. Holiday 2018 will be yet another positive development, so this is a stock worth considering for a nice end-of-year rally.
Retail Stocks to Buy Ahead of the Holidays: Best Buy (BBY)
When it comes to retail turnarounds, few — if any — have been as successful as Best Buy (NASDAQ:BBY).
The go-to consumer electronics retailer was once considered on the brink of bankruptcy thanks to elevated e-commerce competition. Its peers were all going under, most notably Radio Shack and Circuit City, and it looked like a sure thing that Best Buy was going to follow in their footsteps.
That never happened. Instead, Best Buy capitalized on peer bankruptcies, gobbled up market share, and proceeded to dominate the remnants of the dedicated consumer electronics market. That market has actually grown quite nicely over the past several years thanks to the mainstream emergence of IoT, and will likely continue to grow as smart devices become the norm across multiple consumer products.
This holiday season will be especially good for Best Buy. Not only is smart device interest globally at all time highs, but Sears also recently declared bankruptcy, and that is up-for-grabs market share that Best Buy will likely capitalize on this holiday season. As such, BBY stock will likely benefit from a nice end-of-year rally due to strong holiday numbers.
Retail Stocks to Buy Ahead of the Holidays: Macy’s (M)
Like much of the retail sector, Macy’s (NYSE:M) has been in rally mode since late 2017 when it became clear that Amazon wasn’t killing all of retail.
But, the Macy’s rally was short-circuited in early August by middle-of-the-road quarterly numbers that warned about forthcoming margin pressures. Despite that warning, comparable sales growth remained healthy in the quarter, rising 0.5% versus expectations for a 0.9% drop. Also, smoothed out for one-offs, comparable sales are up 2.3% year-to-date, and that is promising for a company that is bouncing back from the dead.
Macy’s should benefit this holiday season from a strong consumer and bankruptcy filings from Sears and Toys R Us. The numbers won’t be amazing. But, they will be pretty good, and almost certainly good enough to lift Macy’s stock.
At current levels, Macy’s trades at just 9x forward earnings with a 4% dividend yield. Those are deep value metrics. As such, even slight growth this holiday season should be enough to spark a nice rally in the stock.
Retail Stocks to Buy Ahead of the Holidays: Kohl’s (KSS)
One of the better performing and more enduring retail stocks over the past several years has been Kohl’s (NYSE:KSS).
Due to its off-price and off-mall nature, Kohl’s has been a retail survivor over the past several years. Comparable sales growth has been mostly positive, margins have been largely stable, and the stock has been in rally mode for the past year and a half.
Nothing about this rally seems to be losing any steam into the holiday season. Last quarter, comparable sales rose more than 3%, gross margins expanded more than 40 basis points, and net profits rose by 40%. Those are strong growth numbers.
Yet, KSS stock trades at less than 15x forward earnings with a 3% dividend yield. In a market trading at 16x forward earnings with a 2% dividend yield, the valuation on KSS stock is relatively attractive. Throw in a big holiday catalyst, and you have the foundation for a healthy near- to medium-term rally in KSS stock.
Retail Stocks to Buy Ahead of the Holidays: L Brands (LB)
One of the worst performing yet most attractively valued retail stocks ahead of the holiday season is L Brands (NYSE:LB).
L Brands, the parent company behind Victoria’s Secret (VS) and Bath & Body Works (BBW), has struggled mightily over the past several years thanks to a huge and rapid slowdown in the VS business. Long story short, there have been secular trends pushing consumers away from VS bombshell beauty products, and towards more natural beauty products. VS has consequently ceded mind-share, popularity, and sales, and LB stock has dropped.
But, VS is an enduring brand with a ton of demand and popularity. It is tough to see VS being phased out permanently. Thus, this is just a recent adverse trend. This trend appears to be reversing course. VS sales showed marked improvement in September, with comparable sales growth jumping into positive territory for the first time since May, and doing so against a much more difficult lap. Meanwhile, LB’s other business, BBW, is doing very well and posting multi-year best comparable sales growth.
Against this improving operational backdrop, LB stock trades at just 14x forward earnings and has a 7% dividend yield. Normally, this stock trades with an 18 forward multiple and 3.6% yield. Thus, if the VS turnaround continues through the holiday season, LB stock could be due for a huge rally.
Retail Stocks to Buy Ahead of the Holidays: Foot Locker (FL)
One of my favorite retail stocks ahead of the holiday season is Foot Locker (NYSE:FL).
FL stock has bounced around violently over the past few quarters. This was once considered an untouchable retail survivor, and FL stock soared in 2016-17 while other retail stocks faltered. But, the Foot Locker rally ended abruptly in mid-2017 as growth slowed, and then the rally turned into a big sell-off as Nike (NYSE:NKE) and other athletic apparel companies started shifting sales to the direct channel.
FL stock has since rebounded due to improving growth and margin trends. But, the stock still trades at just 11x forward earnings with a 2.5% yield. Thus, any positive news could spark a nice rally in FL stock.
This holiday season should be full of positive news for Foot Locker. Not only does the holiday season promise to be a good one for all retailers, but Foot Locker should especially benefit from the resurgence of Nike. For all intents and purposes, Foot Locker is Nike’s footwear retailer. Just shy of 70% of Foot Locker’s merchandise comes from Nike. Thus, if Nike is selling a ton of shoes (and they are, with North America footwear sales up 8% last quarter), that means Foot Locker is selling a ton of shoes, too.
Overall, FL stock should get a big boost over the next few months thanks to the Nike resurgence converging on what will be an already robust holiday retail season.
Retail Stocks to Buy Ahead of the Holidays: Five Below (FIVE)
When it comes to retail winners, Five Below (NASDAQ:FIVE) is second to none.
Over the past three years, FIVE stock has quadrupled from $30 to $120. Why? Because Five Below has found a winning recipe in the retail segment. Five Below is a discount retailer that sells things at — wait for it — $5 or less. But, more importantly, they are a trend-oriented discount retailer with a quickly changing and always dynamic product assortment.
This has been a winning recipe in retail. Over the past several years, Five Below has posted consistently positive and often huge comparable sales growth. Meanwhile, margins have consistently trended higher, too. Plus, the company has a relatively small real estate footprint (only 700 stores), and management thinks that base can grow to 2,500 or more in the U.S. alone.
A powerful unit growth trajectory coupled with a successful retail strategy has made FIVE stock a shining star. This will continue for the foreseeable future. If the holiday season is a blowout one, it will certainly boost Five Below’s numbers. Those strong numbers will keep FIVE stock on its upward trajectory for at least the next several months.
Retail Stocks to Buy Ahead of the Holidays: Costco (COST)
At the center of the retail resurgence and strong U.S. consumers is Costco (NASDAQ:COST).
Amid the October market sell-off, Costco managed to report robust September sales numbers which smashed expectations out of the water and underscored that the U.S. economy is currently firing on all cylinders. The numbers affirmed that so long as the U.S. consumer remain strong, Costco will do well.
In the big picture, Costco has proven its staying power as the Amazon of the brick-and-mortar world. Costco’s membership base is akin to Amazon Prime and gives the company a sticky customer base to consistently fall back on. Meanwhile, those membership revenues allow Costco to price items at huge discounts. Plus, you can find pretty much everything you want at Costco.
In other words, there’s a lot to like about COST stock at current levels. Valuation is the only problem. But, as goes the consumer, so goes COST stock, and the consumer is really strong right now and projects to remain strong into the holiday season. As such, COST stock will likely stay on its winning path this holiday season.
As of this writing, Luke Lango was long ADBE, AMZN, WMT, M, LB, FL, and NKE.