Consumption spending has been the key gross domestic product growth driver for the United States. Prior to the novel coronavirus pandemic, real personal consumption expenditure touched $13.4 trillion (February 2020). However, with the pandemic depressing consumer confidence, the real personal consumption expenditure declined to $11.0 trillion by April 2020.
Summer brought some recovery, with that activity reaching $12.8 trillion in August. With the holiday season approaching, consumption spending is likely to increase further, which should bring retail stocks into focus.
According to Deloitte, “holiday retail sales this year are forecast to rise between 1% and 1.5%.” It’s also worth noting that the U.S. consumer confidence touched a seven-month high earlier this month.
Further improvement in consumer sentiment can potentially result in stronger-than-expected sales in the holiday season. So, let’s look at four retail stocks that are likely to witness positive momentum as retail sales gain traction.
Besides the seasonal factor, the S&P 500 index is trading at a price-to-earnings multiple of 35.3x. With valuations looking stretched and with U.S. elections round the corner, it makes sense to be invested in these low-beta retail stocks.
4 Retail Stocks Gearing Up for the Holidays: Walmart (WMT)
Walmart stock is certainly the top stock among the retail stocks for the holiday season. Recently, Jefferies issued a buy rating on WMT stock with a bullish cash price target of $180.
This would imply an upside of 24% from current levels of $145. Jefferies expects “WMT to command an increasingly larger share of customer spend through bolstered omnichannel capabilities, partnerships, & services.”
It’s important to note that Walmart has been ramping its e-commerce capabilities. For the holiday season, the company expects to hire 20,000 workers “who will help pack and ship online purchases at its fulfilment centers.” With the pandemic, online sales have surged and Walmart is well positioned deliver on that front.
WMT stock also has a beta of just 0.28. With market volatility likely to increase, the stock is worth holding through the next few quarters. An annual dividend of $2.16 is also attractive.
For year-to-date fiscal year 2020, WMT stock has already trended higher by 21.8%. I expect the positive momentum to continue as market enter the holiday season.
Costco Wholesale (COST)
Costco stock has also been trending higher in the current year. I believe that the stock is worth holding through the holiday season.
The warehouse retailer recently reported September 2020 sales and there are several positives to note. The company’s total sales increased by a robust 15.5%. Further, the company’s e-commerce sales surged by 90.3% on a year-on-year basis.
Clearly, the company is clocking stellar growth and I expect sales to be even better in the next three months. In addition, the company’s e-commerce sales growth is encouraging. It’s worth noting that for the fiscal year ended August 2020, e-commerce sales growth was 49.6%. Growth is likely to be higher in the coming quarters.
Besides the holiday season factor, COST stock is also worth holding in the core portfolio. With 105.5 million cardholders, the company generates an annual membership fees of $3.5 billion. The company is just starting to expand in China and I expect steady growth in membership fees.
COST stock also has a low beta of 0.69 and an annual dividend of $2.80. Given the potential for cash flow growth from membership fees, I expect dividend growth to continue in the coming years.
Amazon (AMZN)
Among retail stocks with a focus on e-commerce sales, AMZN stock is the top name to consider.
If we go back to FY2019, Amazon reported record holiday sales with billions of items ordered worldwide. The company also reported strong sales for Amazon devices. Overall, the company’s Q4 2019 earnings exceeded analyst estimates and the stock trended higher.
Things are not likely to be any different this time. AMZN stock has been in a zone of consolidation and the holiday season sales can trigger renewed upside.
It’s worth noting that Amazon’s Prime Day sales (Oct. 13-14) YoY surged by 36%, possibly an early indication of strong sales as the holiday season approaches.
Considering the previously mentioned low beta stocks, AMZN stock sticks out, with a beta of 1.35. However, the company has strong seasonal tailwinds and can outperform even if broad markets are in a correction mode.
Amazon Web Services is also a key growth driver for the company if we look beyond the next quarter. Overall, I am bullish on AMZN stock and I would not be surprised if the stock re-tests all-time highs during the holiday season.
Target Corporation (TGT)
Target is another name among retail stocks that’s worth keeping on the radar for the holiday season. With a low beta of 0.85 and an annual dividend pay-out of $2.72, TGT stock is attractive in current market conditions.
Similar to last year, Target is planning to hire 130,000 holiday workers. However, the focus will remain on online orders.
Target has already been an outperformer. The company’s Q2 2020 results beat analyst estimates and same-store sales surged by 24.3%. I would not be surprised if the strong sales momentum sustains in the holiday season.
According to Deutsche Bank, the company “has a strategy that will resonate with consumers including Black Friday pricing throughout all of November.”
Therefore, the outlook is positive and TGT stock has already been discounting the likely growth. However, I believe that there is more juice in the rally with the stock trading at a forward P/E of 22.8x.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
