With retail stocks hammered in the coronavirus-driven market selloff, should you buy the dip?
Some retailers, like Costco (NASDAQ:COST), may see upside from the panic. But, there are scores of retailers who could see diminished profits in the near term. Why? Supply shocks, for one. Also, if this crisis causes a recession, expect to see decreased consumer spending.
The brick-and-mortar retail sector is already feeling a squeeze thanks to Amazon (NASDAQ:AMZN). In other words, the “retail apocalypse.” This may be a more material factor for smaller, niche retailers. However, even major retailers struggle to stay relevant in the face of e-commerce growth.
With these factors in mind, it may be a great time to unload some retail positions. And taking a look at large-cap names, three stand out as retail stocks to sell.
So, let’s dive in and find out why.
Retail Stocks to Sell: Burlington Stores (BURL)
Just before the selloff, Burlington Stores (NYSE:BURL) stock hit an all-time high of $250.89. Nearly fifteen times its 2013 IPO price! But despite a tremendous run in recent years, we may have reached a peak for the off-price retailer.
Sales growth remains strong, but valuation is a concern. BURL stock trades at a forward price-earnings (P/E) ratio of 26.3. Compare that to peers Ross Stores (NASDAQ:ROST), which trades for 20.3 times forward earnings. Or TJX Companies (NYSE:TJX), which goes for 20.7 times forward earnings.
That’s not to say Burlington shares are going to crash to prior-year price levels. But, as the market trends lower, expect the company’s valuation to contract. Assuming valuation falls to the forward P/E of peers, shares could fall to around $170 per share. In other words, more than 20% from the March 6 closing price of $214.23 per share.
And that’s assuming earnings hit on target. If the company posts lower-than-expected results, shares could fall further. Overall, whether or not the company’s stores stay resilient in a potential downturn, “priced for perfection” BURL stock could be a clear sell.
Dollar General (DG)
At first glance, Dollar General (NYSE:DG) stock seems like a great recession-resistant play. InvestorPlace Market Strategist William Roth even listed it on his Feb.24 list of top discount retail stocks to buy.
However, perceived upside could already be priced into shares — and then some.
Not only does DG stock trade at a high forward multiple (25.1) for a retailer. Shares trade at a sharp valuation premium to competitor Dollar Tree (NASDAQ:DLTR), which trades for just 14.8 times forward earnings. Granted, analyst consensus does call for greater earnings growth from the former than the latter.
But, this substantial premium may leave Dollar General shares exposed to a multiple contraction if markets continue to trend lower. So with this downside potential, acquiring DG stock today may not be a profitable move in the short-term.
Long-term, though, could be another story. DG stock has been a great compounder in the past decade. At lower prices, shares may be a screaming buy. But today? Sell now, and consider it an opportunity at a more reasonable valuation.
After rallying sharply in 2019, Target (NYSE:TGT) stock has fallen back to earth since the start of the year. The reason? Disappointing holiday season sales. As InvestorPlace’s Dana Blankenhorn wrote back on Jan. 17, Target’s preliminary holiday season results caused investors hit the sell button, with shares dipping 7%.
Moreover, shares fell further thanks to the general market selloff. But, with the release of full Q4 2019 (ending December 2019) results on March 3, investors had more reason to bail out of Target shares. Again, weak sales growth numbers have scared off investors from the second largest discount chain. Yet, even with low expectations priced in, shares remain a sell.
Why? It’s not because of valuation. Target shares continue to trade at a discount to competitor Wal-Mart (NYSE:WMT); Nor is it strategy. Target has also made the right moves in terms of staying relevant in the age of Amazon. But these positive factors are no guarantee the retailer is going to move the needle anytime soon.
Analysts still call for the company’s earnings to grow between this year and next. Yet, with as many “up revisions” as “down revisions” among analyst earnings estimates, all bets are off whether the company will again disappoint when it next announces results in May.
So, with the investing community turning against TGT stock, shares remain one of the top retail stocks to sell. Perhaps if shares fall further, the company will again be a screaming buy.
But in the near-term? Don’t count on it.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.