Recession talk began percolating through financial markets about a year ago, around the same time that the trade war between the U.S. and China started heating up. Ever since, retail stocks have been killed, with the SPDR S&P Retail ETF (NYSEARCA:XRT) down about 24% over the past year.
My take on the retail stock carnage? The sell-off is overdone, and what you have now is a golden buying opportunity ahead of what should be a really strong holiday 2019 shopping season.
The U.S. economy is not heading into a recession anytime soon, mostly because the consumer is rock solid and they drive two-thirds of U.S. economic output. You have favorable labor conditions (record low unemployment and decade-high wage growth) on top of favorable credit conditions (low and dropping rates, and record high credit scores) and favorable savings conditions (a near twenty-year high personal savings rate).
That’s a favorable backdrop for U.S. consumers. It implies that, all else equal, U.S. consumers will spend big this holiday season.
The trade war could derail the U.S. consumer. But, such concerns are overstated. My theory: U.S. President Donald Trump’s recent tariff threat is just a chest puff to get the Federal Reserve to cut rates. Once he gets those lower rates, Trump will pull back the tariff threats, because he doesn’t want a weak economy heading into an election year.
Thus, by the end of 2019, we will have a U.S. economy with low rates, reduced trade tensions, and strong labor conditions. That’s a favorable backdrop for retail stocks to bounce back into the end of the year.
Retail Stocks to Buy on the Dip: Target (TGT)
% off 52 Week High: 3%
At the top of this list of retail stocks to buy is general merchandise giant Target (NYSE:TGT).
The bull thesis here is pretty simple. Target has been firing on all cylinders for the past several years, as the company has doubled down on growing its e-commerce business and expanding its omni-channel capabilities. These investments have produced decade-best comparable sales and traffic growth metrics for the past several quarters.
In other words, this company has a ton of momentum at the same time that the U.S. consumer has a lot of purchasing power. That’s a favorable combination. Ultimately, it means that as U.S. consumers turn higher wages into higher retail spend over the next few months, a big portion of that increased spend will find its way into Target stores and onto Target.com.
The result? Continued strong comparable sales and traffic growth into the end of the year. That continued red-hot growth should push TGT stock to new all-time highs.
% off 52 Week High: 30%
Second on this list of retail stocks to buy amid recent weakness is America’s largest grocer, Kroger (NYSE:KR).
Kroger stock has been killed over the past year — 30% off 52 week highs — mostly because investors have been concerned about competition impacting top- and bottom-line growth trends. Specifically, investors have continued to express concern with regards to Target, Walmart (NYSE:WMT), and Amazon (NASDAQ:AMZN) all more aggressively moving into the grocery space.
But, the Target/Walmart/Amazon push into groceries isn’t anything new. It has been happening for a while now. While it has created some margin pressures, Kroger has largely maintained positive comparable sales and traffic growth amid this era of heightened competition (some would say thanks to Kroger’s booming private label business).
The implication? Kroger will maintain its leadership position in the stable growth grocery market for the foreseeable future. This grocery market is doing really well right now (3.3% sales growth over the past three months), and should continue to do well so long as labor conditions in the U.S. remain favorable. There’s also the underrated CBD tailwind which may provide a lift to Kroger’s numbers.
Thus, into the end of the year, Kroger should report better-than-expected numbers which will breathe life back into this beaten up and dirt cheap KR stock.
Five Below (FIVE)
% off 52 Week High: 25%
Third on this list of retail stocks to buy on the dip is one of the retail sector’s best-performing stocks over the past few years, rapidly expanding discount retailer Five Below (NASDAQ:FIVE).
Over the past five years, Five Below has leveraged its unique sales proposition — selling trendy items at $5 or less — to drive consistently positive comparable sales growth which, on top of big unit expansion (Five Below is opening roughly 100 stores per year on a few-hundred-big store base), has driven steady 20%-plus revenue growth. The positive comps have driven positive operating leverage, too, so profit growth has likewise been north of 20%. Against the backdrop of 20%-plus profit growth, FIVE stock has gained nearly 195% over the past five years.
This red-hot rally in FIVE stock has hit a road bump over the past year. Elevated trade tensions and the the threat of more tariffs have weighed on Five Below investor sentiment, and FIVE stock presently trades 25% off its 52-week highs.
But, this is purely a sentiment issue. Fundamentally, nothing has changed. Last quarter, Five Below reported a 3%-plus rise in comparable sales, a 20%-plus rise in revenues, and 10 basis points of gross margin expansion. Management also said that they could offset higher costs from tariffs with price hikes.
Thus, the fundamentals remain strong. Because of this, as trade concerns ease over the next several months, investor sentiment surrounding FIVE stock should meaningfully improve, and drive a big rebound rally in FIVE stock.
Foot Locker (FL)
% off 52 Week High: 40%
Next up we have beaten-up athletic footwear retailer, Foot Locker (NYSE:FL).
The big problem at Foot Locker is that this company finds itself at the epicenter of the trade war. The athletic apparel industry sources a lot of product from China. That means a lot of Foot Locker’s core products are subject to tariffs in the U.S.-China trade war. That translates into higher costs and lower margins, since Foot Locker can’t pass on the costs to consumers in an already competitive athletic apparel market.
Investors have been obsessed with this potential negative margin hit from the trade war. As such, despite the company reporting positive comps and margin expansion last quarter, FL stock has dropped to trade 40% off its 52-week highs.
The writing is on the wall here — the only way FL stock rebounds, is if trade tensions between the U.S. and China cool down. As I wrote in the intro to this gallery, I think that’s exactly what will happen into the end of the year, given that neither side wants these trade tensions to escalate much further.
As trade tensions cool down, investor sentiment will improve. That improving sentiment will converge on strong back-half 2019 numbers from Foot Locker, supported by a healthy U.S. consumer and favorable athletic apparel adoption trends. This convergence should propel a meaningful recovery in beaten up FL stock.
Best Buy (BBY)
One retail stock which looks particularly compelling amid recent weakness is consumer electronics retailer Best Buy (NASDAQ:BBY).
When it comes to BBY stock, there’s the long-term bull thesis, and there’s the near-term bull thesis. With respect to the long-term bull thesis, you have a company that has established itself as the go-to retailer in the secular growth consumer electronics market. Long story short, the consumer electronics space is rapidly expanding, thanks to secular tailwinds which are pushing supply higher (every product is becoming integrated with the internet these days) and pushing demand higher (consumers want all these internet-connected devices).
Best Buy is a big-moat, wide-reach, very-relevant player in this rapidly expanding market, and as such, is positioned to report healthy top and bottom line growth over the next several years. Those healthy growth trends will keep dirt-cheap BBY stock — 11.2-times forward earnings — on a long term uptrend.
In the near term, BBY stock will move higher because cooling trade tensions and strong back-half 2019 numbers, driven by favorable labor conditions, will converge on a beaten up stock to produce out-sized returns.
Overall, then, BBY stock looks ready for a big rebound rally in the back half of 2019, the likes of which should keep this stock on a long-term winning trajectory.
Under Armour (UAA)
% off 52 Week High: 30%
Those who read my writing know that I am not a big fan of Under Armour (NYSE:UAA). But, the recent sell-off in UAA stock is so overdone, that this stock has become a compelling buy for a holiday 2019 rally.
The fundamental story here is easy to digest. As I have said before, Under Armour is the wrong company in the right market, in that they have exposure to the secular growth athletic apparel space, but have missed the lifestyle pivot and remain a performance-first brand. That’s why this company has been among the slowest growers in this space for the past several quarters (although the company is benefiting from big margin expansion thanks to a depressed base).
Nothing about this narrative has changed. Under Armour remains a performance-first brand, with a low single-digit revenue growth rate and big margin drivers. What has changed, though, is that UAA stock has tumbled 30% in the past two weeks because of an earnings report that wasn’t that bad, and because of tariff concerns which were overstated.
Now, UAA stock is dramatically undervalued and testing long term support levels. The stock has held those support levels, trade tensions should ease going forward, and holiday 2019 numbers should be better than what’s priced in right now. As such, while Under Armour has its secular challenges, UAA stock looks like a good buy on this recent big dip.
% off 52 Week High: 35%
Last, but not least, on this list of retail stocks to buy on the dip for a holiday 2019 bounce is online furniture retailer, Wayfair (NYSE:W).
Wayfair finds itself on this list for the same reasons that Under Armour finds itself on this list. Specifically, Wayfair has dropped big over the past two weeks because of overstated trade concerns, and is now testing long term support levels which appear ready to hold. If they do hold, history says Wayfair stock could be due for a huge bounce-back rally into the end of 2019.
The fundamentals line up with this bull thesis. Wayfair has a profit problem in that the company has never produced a profit. That’s a big problem when rates are climbing, since higher rates dilute the value of future profits (which is where Wayfair stock gets all of its value, since there are no profits today). But, it’s less of a problem when rates are falling, since lower rates increase the value of future profits.
Right now, we are in a very low rate environment. That actually helps support Wayfair stock’s lofty valuation. At the same time, low rates promote big ticket purchases – of which, housing and home furnishings are two of them.
As such, Wayfair appears ready to report better than expected back-half 2019 numbers, against a favorable valuation backdrop. Thus, the fundamentals line up with the technicals here, and from all angles, Wayfair stock appears ready to rally into the end of the year.
As of this writing, Luke Lango was long TGT, KR, WMT, AMZN, FIVE, FL, BBY, and UAA.