It’s no secret that retail stocks have had a tough decade. Amazon (NASDAQ:AMZN) came onto the scene and decimated the sector stocks. Worst hit were the traditional brick-and-mortar retailers like Macy’s (NYSE:M). Many perished and most of the rest are still working triple overtime to try and find ways to deal with this major industry shift. For the most part, the Amazon riddle still lingers.
Perhaps it’s the advent of many technological changes that also came about at the same time that added to the confusion in the space. The whole world suddenly switched its shopping trend from walking the malls to surfing the net.
The new digital way of shopping is far too convenient and effective that the draw is very strong and the migration to it is exponential. Meaning this trend is irreversible.
But it would be wrong to paint all retail stocks with one broad ugly brush. There are still gems in the rough. Amazon clearly is one since it is the cause of the debacle. Lululemon (NASDAQ:LULU) and Ulta (NASDAQ:ULTA) are two other ones that still shine on main street as well as Wall Street.
Today, we examine ways to trade these three stocks from both the short- and long-term perspectives.
But first we have to note that the S&P 500 is at all-time highs, which means that there are a lot of fresh profits. And so this means buying stocks now has by definition considerable downside immediate risk.
Nevertheless, owning AMZN, LULU or ULTA stock for the long-term has rewarded investors well. This will continue since their management teams are proven winners.
This is the beast that killed the old ways of shopping. It did it with thin margins. They drove the competition to their knees all-the-while critics doubted and mocked them for losing money.
Under the leadership of Jeff Bezos, it sacrificed profits to grow their piece of the pie. That is a template that every growth company should follow. A startup has to spend a lot to grow a lot.
AMZN took this to an extreme because it did not stop down one vertical. It tested hundreds and landed a few home runs. Most notably was the success of its AWS. It now dominates the cloud and the other giants like Microsoft (NASDAQ:MSFT) are merely playing catch up.
So the decision to buy Amazon stock is a an easy yes. As to the exact timing, it’s a trickier answer that depends on an investor’s time frame. Short term, this is a momentum stock, so it moves fast. Last week, it triggered a bullish pattern and it’s unfolding still. But in the long term, timing won’t matter much.
A twist: This week, Netflix (NASDAQ:NFLX) reports earnings and it will likely move the whole FANG gang, including AMZN stock. So buying AMZN now would make for a relatively safe lotto trade on NFLX earnings.
Other than the infamous see through pant debacle, LULU management hasn’t given investors reason to worry. They have been consistent in their execution on plans.
Yoga-wear is now a very popular category of clothing and they have expanded on it still for both men and women. I don’t know the statistics on it, but I bet that there are much more non-yoga activities done in LULU clothes than yoga.
The point is that they have done a great marketing job and shoppers assimilated their wears as a way of life. That’s why they continue to impress Wall Street as Main Street struts LULU wears.
Fundamentally, LULU stock is expensive at price-to-earnings ratio of 50 and 7X sales. But then again, investors have given LULU a pass on that front as long as it continues to grow.
Year-to-date, LULU stock is up 54%, which is 15 percentage points higher than AMZN and much better than the SPDR S&P Retail ETF (NYSEARCA:XRT). Clearly Lululemon is doing well.
Technically, Lululemon stock is at all-time highs, so it’s hard to discern much from that except to say it’s okay if it falls a bit from here to establish the recent breakout line as forward support. As long as LULU holds about $175 per share, the short-term trend is intact.
There is a big open gap down to $150 per share but I think this would need serious bad news to get filled.
Ulta Beauty (ULTA)
The case for ULTA stock is very similar to LULU. Ulta is also in control of its product lines and it has done a masterful job at marketing. Its clients are loyal and keep buying the whole image as a way of life.
The selfie generation wants to look good at all times and the “influencers” on social media are making massive impacts.
Ulta stock is slightly cheaper than LULU as it sells at 30 P/E and only 3X sales. But compared to retail stocks in general, it’s not a massive bargain either. But as with the two other stocks today, this one is also worth it for the longer term.
It’s succeeding as a growth stock, so it’s acceptable for it to be more expensive. YTD, Ulta stock is up 45%, which is 9X better than the XRT and 2X better than the S&P 500. So just like all of today’s stocks, you get what you pay for.
Technically, ULTA is also near highs, but it still has room to run. The 50% rally off the December lows, even though it has gone so far already, could be leg 1 of 3 of a pattern to target $420 per share.