As the novel coronavirus pandemic swept across the globe and shut down the physical economy in early 2020, shares of Foot Locker (NYSE:FL) fell off a cliff. In early February, FL stock was up above $40. By late March, shares dropped below $20.
Foot Locker stock has since recovered some ground, clawing its way back to the mid-$20s over the past two months on hopes that the U.S. economy will gradually reopen and rebound over the next few months.
Those hopes are slowing turning into reality.
That is, over the past few weeks, an overwhelming volume of data has emerged which supports the idea that not only will the U.S. economy reopen over the next few months, but economic activity should rebound swiftly, too.
Alongside this strong economic recovery, Foot Locker stock will soar. All the way back to $40. That implies ~50% upside potential from current levels.
So, I say buy the dip in FL stock. Let the great second-half economic recovery push shares higher. And don’t sell until the stock is back to where it was pre-Covid-19.
The Great Economic Rebound
Get ready for the great economic rebound of 2020.
Over the past few weeks, an overwhelming amount of data has emerged which supports three big ideas. One, the worst of the coronavirus pandemic is over. Two, the economy is reopening rapidly. And three, consumers are ready to get back out there and spend money, which will fuel a huge economic rebound in the second half of 2020.
- The science surrounding Covid-19 has gradually shifted, with the most recent data suggesting that the virus is not as deadly as initially feared. Rather, it’s only slightly more deadly that the common flu for most people younger than 50.
- Given shifting science, pandemic hysteria is fading, as the number of Americans that categorized themselves as “extremely worried” about Covid-19 has dropped from 28% in late March, to 23% in late May, according to a Statista survey.
- The economy is gradually reopening, with states such as Arizona, Georgia, Florida, and Texas getting back to “business as usual.”
- The economic reopening illustrated that there is ample pent-up demand from consumers, as beaches and restaurants were very crowded this past Memorial Day weekend and malls have reported strong early reopening traffic trends.
- Consumer confidence levels have already bottomed, at surprisingly high levels (about double where they bottomed in the Great Recession of 2008-09), despite ugly labor market conditions because most consumers who were fired during this pandemic (87%) expect their layoff to be temporary.
In other words, almost as quickly as the U.S. economy shut down and collapsed in March and April, it will reopen and rebound in the second half of 2020.
Foot Locker is a Strong Retailer
Foot Locker isn’t your average mall retailer struggling to stay relevant in the dynamic retail landscape.
Instead, Foot Locker is a differentiated seller of full-price, premium athletic footwear, that has a branded in-store experience and strong omnichannel commerce capabilities.
Most importantly, Foot Locker is an indispensable part of the athletic apparel distribution network. That’s especially true for Nike (NYSE:NKE) – the king of the athletic apparel market. Nike and Foot Locker have worked together multiple times over the past several years and Nike accounts for 70% of Foot Locker’s sales. All signs point to Nike continuing to lean heavily into Foot Locker as an important sales channel in its distribution network.
So long as that remains true, and so long as athletic apparel remains in demand, then Foot Locker should sustain a positive sales and profit growth trajectory.
Below $30, that reality simply isn’t priced into FL stock.
FL Stock Has 50% Upside Potential
As the U.S. economy reopens and rebounds over the next six months, Foot Locker stock will rise by 50% to $40.
I get to that number two ways.
First, $40 is where FL stock traded pre-Covid-19. By the beginning of 2021, the U.S. economy should look very similar to how it looked in early 2020. Assuming so, then FL stock should be able to rebound back to its pre-Covid-19 levels by then. That gets you to a $40 price tag for FL stock by late 2020 or early 2021.
Second, $40 is the level which my modeling suggests is “fair” for FL stock. Assuming Foot Locker can leverage its strong relationship with Nike to maintain 2% revenue growth over the next few years and drive profit margin stabilization, then $5 in earnings per share is a doable target for Foot Locker by 2025.
Foot Locker stock normally trades at 12 times forward earnings. Based on that normal multiple and a 10% annual discount rate, $5 in 2025 earnings per share implies a 2020 price target for FL stock of over $40.
In other words, both the optics and fundamentals support FL stock at $40 in the foreseeable future.
The Bottom Line on FL Stock
It’s time to buy retail stocks. These stocks were beaten and bruised in March and April. Now, though, the economy is starting to reopen. Even further, signs are emerging that consumers are ready to spend money and fuel a strong economic rebound.
If so, then over the next few months, retail stocks will bounce back in a big way.
In that group of resurgent retail stocks to buy, FL stock is one of my favorites. The fundamentals are strong. The optics are good. And the stock is way undervalued.
Rebounding consumer spending and improving investor sentiment should push this stock up 50% over the next few months.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.