Even though the U.S. economy has decelerated, there is one key source of strength: consumer spending. And this should bode well for the upcoming holiday season and retail stocks in general.
Of course, there is likely to be continued strength on the ecommerce front, benefiting the mighty Amazon (NASDAQ:AMZN).
Yet the brick-and-mortar retailers should also get a nice boost. According to research from the National Retail Federation, holiday sales are predicted to grow by between 3.8% to 4.2 % to $727.9 billion and $730.7 billion.
While that certainly sounds promising, there are certainly risks. Here’s what the NRF President and CEO Matthew Shay had to say: “Nonetheless, there has clearly been a slowdown brought on by considerable uncertainty around issues including trade, interest rates, global risk factors and political rhetoric. Consumers are in good financial shape and retailers expect a strong holiday season. However, confidence could be eroded by continued deterioration of these and other variables.”
Given all of this, what are the retail stocks to buy? Here’s a look at three stand out names in the space.
Retail Stocks to Buy: Best Buy (BBY)
Among retails stocks, Best Buy (NYSE:BBY) has been a surprise winner. The company seemed to be an obvious target for disruption from the secular move to ecommerce. Yet the fact is that BBY stock offers some key advantages.
After all, many consumers want more than a few photos and videos before buying a high-cost technology item. But there is also the need to learn about the features and alternatives when shopping.
So BBY stock has had a pretty good ride this year, up about 35%. And the company has continued to grow at a nice pace and its margins have been solid. BBY is also getting traction with its domestic online sales, up 17.3% to $1.42 billion in the latest quarter.
As for the valuation on BBY stock, it is trading at a reasonable level. Consider that its price-to-earnings ratio is only about 13X. BBY stock also has a decent dividend yield, which is currently at 3%.
TJX Companies (TJX)
When it comes to retail stocks, there are certainly legitimate concerns about some of the long-term trends. Let’s face it, the malls are becoming less relevant with consumer sales. There is also the continued focus on discounting.
However, when looking at retail stocks, there are many ways to minimize the issues. One good choice is TJX Companies (NYSE:TJX).
The company has been a consistent strong performer. For the past 23 years, TJX has posted positive comparable sales (there was only one decease over a period of 40 years!).
As for the latest quarter, net sales rose by 5% to $9.8 billion and earnings came to 62 cents a share. While the comparable sales were up only 2%, this was compared to last year’s 6% increase.
According to CEO Ernie Herrman: “We were very pleased that customer traffic drove our consolidated comp and was up at each of our four major divisions. This quarter marks the 20th straight quarter of customer traffic increases at TJX and Marmaxx. This speaks to the consistency and fundamental strength of our treasure-hunt shopping experience through many types of retail and economic environments.”
Among the large retail stocks, Target (NYSE:TGT) has had one of the most impressive bull moves this year. The shares are up a sizzling 67%.
But the momentum is likely to continue. And no doubt, the holiday season will be a great catalyst.
During the past few years, Target has invested heavily in transforming its business. The initiatives have included improvements in the stores, the merchandise, pick-up delivery and online systems.
The bottom line: The strategy is starting to pay off in a big way. During the latest quarter, comparable store sales rose by 3.4% and the company raised its full-year earnings forecast to $5.90 to $6.20 a share, compared to the prior outlook of $5.75 to $6.05 a share. There was also a 34% jump in online sales.
Finally, TGT stock is trading at a fair valuation, with the price-to-earnings multiple at 18X. This is definitely a reasonable level in light of the strong traction in the business, which should last for some time.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.