We are finally in the home stretch of 2020. The holidays are in sight, along with the New Year. That means it’s time to look at stuffing your portfolio with a few retail stocks.

Of course, this has been a horrible year for the sector. The pandemic has destroyed shopping malls and even strip malls are in dire shape. In their place, we have bigger and bigger boxes. We’re talking discount supercenters, warehouse clubs and the biggest virtual store of all, Amazon.

The stock market has, as usual, taken note of these trends. It has put high prices on the market leaders, with the smaller, more challenged companies going for pennies on the dollar. But somewhere in that rack, careful investors may discover a bargain. Or at least, they might find an executive or strategy worth betting on.

So, whether you’re feeling like George Bailey or Harry Potter this season, there is something for everyone in this holiday super gallery. Here are nine retail stocks that might just warm you by the fire — if you play things right.

• Amazon (NASDAQ:AMZN)
• Target (NYSE:TGT)
• BJ’s (NYSE:BJ)
• Ulta (NASDAQ:ULTA)
• Bed Bath & Beyond (NASDAQ:BBBY)
• Kohl’s (NYSE:KSS)
• Best Buy (NYSE:BBY)
• Gap (NYSE:GPS)
• Macy’s (NYSE:M)

Retail Stocks to Buy or Avoid: Amazon (AMZN) 

To start off my list of retail stocks, let’s dive into one of the heaviest hitters in the industry, Amazon. In a lot of ways, Amazon is in the process of becoming something like Walmart (NYSE:WMT). But should it? 

As of mid-November, the retail and tech giant was selling at almost four times its expected 2020 revenue of $400 billion, based on second-quarter sales of over $88.9 billion. Conversely, Walmart trades at around 80% of the $524 billion in revenue it saw last fiscal year. In order to compensate for the slow, big number growth, Walmart offers a dividend of 54 cents a share with a yield of 1.45%.

Amazon is right behind it. The “whisper number” on Amazon’s Q4 sales is $112.5 billion. That’s over $30 billion short of what Walmart should do for its quarter ending in January. But it’s closing in, fast. 

That’s because the secret to Amazon is investing its cash flow. And it’s actually a secret Amazon founder Jeff Bezos learned from the late Walmart founder Sam Walton.

As of Q3, Amazon had trailing-12-month operating cash flow of over $55 billion. However, it put much of that into property and equipment. Needless to say, the company has invested heavily in its logistics branch. However, the problem is that the gains from this focus on distribution aren’t that big. Truck and plane costs keep rising, not falling.

So, as Amazon becomes Walmart, it also loses margin. For all of its control over suppliers — and its distribution network — WMT’s Q3 consolidated net income of $5.2 billion is still less than 4% of net sales. AMZN’s is only slightly higher.

Finally, the companies are becoming similar in another way. The fastest growing piece of Walmart’s e-commerce business is now on behalf of third-party sellers.  The company is Amazon’s biggest competitor in this area.  

Since hitting its peak of over $3,550 per share in early September, Amazon stock has been trading worse than Walmart. Amazon shares are down 12% from the peak, while Walmart shares are relatively flat.  

Evidently, cloud investments drive more profitable market share than planes, trucks and delivery vans. Amazon’s trailing price to earnings ratio — which was once stratospheric — is now near 91. Still high, but no longer triple-digits.

Right now, you may be tempted to call Amazon a bargain. But it’s really settling down to Earth. AMZN stock is being measured against competitors like WMT, whose trailing price to earnings ratio is 24 and whose sales growth is projected to hit 5.5% this year.  

So, if Amazon expects to maintain its sky-high valuation, it should find another route. Investors should take note of this competitive relationship before they buy AMZN stock.

Target (TGT)

Target has long been a favorite of mine when it comes to retail stocks. 

However, now that it has caught up to Walmart and differentiated itself, where can the company find growth? If you’re buying TGT stock now, growth is what you’re betting on. At its Nov. 19 opening price of almost $169, Target’s market capitalization is nearly $86 billion.  

But with a market cap at about the same level as its annual sales, Target is showing some dangerous signs. While tech companies sell for many times their annual sales, retailers almost always sell at a discount. That’s because margins are thin and growth rates are often limited. 

Target is a retailer. It’s a great retailer and investors have rewarded it. But the 68-cent-per-share dividend that once looked rich is now yielding just 1.63%. You’re paying almost 24 times earnings for growth in the high single-digits. 

Then there’s the location strategy. Target has deliberately chosen to build small stores near urban centers. Over the year, those locations have been less popular because of the pandemic.

Finally, there are labor troubles. Gig workers at Shipt — a delivery service the company created in Alabama — are not getting the same raises other employees are getting. Some of the gig workers have gone on strike.

Of course, there are still reasons to like Target, starting with CEO Brian Cornell. Additionally — as enclosed shopping malls continue to die away — Target will pick up market share. Half of the company’s former department store rivals may be gone by next year. 

Still, I think Target is fully valued right now. It can show faster growth than Walmart because it’s smaller in size. As a result, TGT should continue to grow its top- and bottom-line this holiday season.

But shares are due for a breather. Target is no longer a discount — it’s at full price. Investors should wait for it to go back on sale.  

BJ’s (BJ)

Everyone knows that Costco (NASDAQ:COST) has been a big winner during the pandemic. But shares in its smaller competitor, BJ’s, have done just as well. That makes it one of the retail stocks investors should consider closely this holiday season.

For its current quarter, BJ’s has an estimated sales growth of 14%. The shares are also up about 90% for the year, far outpacing Costco’s 31% gain and even beating Amazon. There are now 216 BJ’s Warehouse Clubs. That’s against 782 Costco locations and about 600 Sam’s Clubs.  

Moreover, while Costco developed around edge cities and Sam’s Club stores followed Walmarts, BJ’s is based in Massachusetts and has a particularly big presence around New York City. With tighter living quarters, New Yorkers were slow to pick up on the quantity-warehouse ethic. But the pandemic seems to have changed that. 

BJ’s has taken advantage of Covid-19 with online ordering and contactless grocery pick-up. That alone helped boost digital orders by 300% year-over-year (YOY) over the summer. The company hopes to keep that momentum up.

Plus — because the growth is recent — BJ stock is still trading on the cheap. The company’s $5.8 billion market cap is less than half of its annual sales. Additionally, the trailing price to earnings ratio is nearly 19, less than half of Costco’s. Before the pandemic started, BJ’s changed hands at around $20 a share. Now the stock is over $40.

The question is whether this trend will continue as Covid-19 eases. Analysts following the stock have an average price target of over $49 — a nice gain. My guess is that the company will beat estimates moving into the holidays.

If the growth is sustained, BJ stock will justify a higher multiple on sales and earnings. Still, if there were a Costco on one side of the street and a BJ’s on the other, which one would you go to? At some point in the next few years, that will become the question.  

Ulta (ULTA)

On Nov. 10, Ulta stock rose 7.4%. That came after the company announced a partnership with Target, raising its prospects as one the better retail stocks on the market.

As part of the deal, Ulta will create 100 in-store beauty shops at select Target locations, plus an e-commerce section on Target’s website. And if the deal goes well, there could be hundreds more — after all, Target has over 1,800 stores. With Ulta at over 1,000 stores, the agreement could potentially more-than-double the beauty chain’s footprint.

What’s more, under CEO Mary Dillon, Ulta has grown by double digits every year — although growth has slowed in recent years as the company has matured. In stores, workers do hair treatments, makeup and eyebrows, recommending products along the way. In Target locations, however, Ulta employees will only be selling products. Some media has already celebrated the deal.

So, clearly Ulta has a long runway of growth. The deal with Target cements its status, making the company’s products more widely available and convenient.

While ULTA stock is pricey, it’s also a long-term pick that investors can be confident in. If Dillon remains at the helm, your investment in this pick of the retail stocks appears safe.  

Bed Bath & Beyond (BBBY)

If you bought BBBY stock last year, then stayed the course and kept it, your patience has been rewarded. 

Shares in the home goods retailer opened at over $20 on Nov. 18. A year ago, they were at $14, before hitting a pandemic low of around $4 in early April. The stock is still cheap. We’re talking about a market cap of roughly $2.5 billion for a chain that should do $10 billion in business this year.  

But hope for the future lies with the company’s new CEO Mark Tritton — and the team he is putting together.

First, there is CFO Gustavo Arnal, who is focused on upping the company’s working capital. In August, it stood at $1.24 billion. To increase it, BBBY is closing 200 stores and cutting inventory. The company also sold its Christmas Tree Shops, Linen Holdings and other businesses for a total of $250 million.

Additionally, Chief Merchandising Officer Joe Hartsig is reducing coupons while new Chief Digital Officer Rafeh Masood has already simplified online checkouts. Finally, merchandising GM Elizabeth Meltzer will be developing a new set of store brands that stand on their own and focus on quality. 

Having gotten the new team together and assured the company’s survival, Tritton can now launch those store brands. The goal is to provide brand quality as good as the competition, but priced low and offered conveniently — both in stores and online. By 2023, these brands could make up one-third of sales. Meanwhile, Arnal is buying back $225 million in stock to put a floor under the price.  

Of course, BBBY stock is a long-term bet right now — a three to five-year proposition — but I think it makes sense. Investors should take note of the current turnaround efforts. In a few years, Bed Bath & Beyond could be one of the better retail stocks.

Kohl’s (KSS)

Kohl’s shares fell hard at the start of the pandemic, losing half their value in a matter of weeks. And they haven’t gotten it back. The company is now worth just one-fifth of sales, in a world where profitable retailers typically sell for half. If it can get anywhere near normal, KSS stock is a bargain.  

Even before the pandemic, CEO Michelle Gass was struggling to adapt to a market affected by e-commerce. Kohl’s runs large stores that anchor strip malls the way grocery stores did back in the day.  

But Gass saw these stores were too big, deciding to downsize selection and rent out in-store space to companies that would draw traffic. Her first move was to go up-market, stocking products from Under Armour (NYSE:UAA) and more. Additionally, Gass has rented out in-store space to Planet Fitness (NYSE:PLNT) and created the Kohl’s Wellness Market.

However, Gass’ most controversial move by far was allowing Amazon to take returns at its 1,200 stores. The CEO says this makes the company an “omnichannel fulfillment center.”

The idea behind all of these moves isn’t just to make Kohl’s smaller. It’s to keep Kohl’s relevant. This gives the company a chance to gauge its customers’ needs and sell them what they want. 

Gass has been running Kohl’s since 2018. Before that, her career featured a turn at Starbucks (NASDAQ:SBUX) where she helped created the chain’s moneymaking Frappuccino. BizTimes named Gass its “CEO of the year” in 2019.

So, if anyone can get Kohl’s out of the ditch, it’s Gass. Investors looking to buy retail stocks should consider the value of her leadership.

Best Buy (BBY)

Best Buy has been among the best retail stocks to own in 2020. Somehow, though, it’s still relatively cheap. For instance, the company’s nearly $31 billion market cap is just 18.5 times earnings. BBY stock also has a 55-cent-per-share dividend, currently yielding 1.87%.

What makes Best Buy truly special, however, is how it has withstood the onslaught of e-commerce. The company has been able to outlast the same way as Ulta — by emphasizing service.  

Best Buy’s secret sauce is The Geek Squad, acquired in 2002. The unit provides both in-person and over-the-phone support. This creates value for the company’s extended warranties and makes service a profit center. 

The Geek Squad helped keep Best Buy from being pulverized by the rise of e-commerce and the sturdiness of modern electronics. In fact, it gave the company time to develop its own web store in order to compete. 

Like most retail stocks, the holiday season is the most profitable time of year for BBY. Last fiscal year, the company’s Q4 earnings per share increased 6% to $2.84 per share. Q4 revenue was also roughly 35% of revenue for the entire fiscal year. Right now, analysts at Zack’s expect earnings to be up 18%. 

So, now might be a good time to buy a stake in BBY stock, before hedge funds jump back in. A good company selling for less than its peers always looks like a bargain. Moreover, Best Buy’s recent dip means it’s the prime time for you to step in.  

Gap (GPS)

How forgiving has 2020 been for retail stocks?  

Well, GPS stock is now trading at around $23 a share, almost 34% higher year-to-date (YTD) than where it closed in 2019. The company currently has a market cap of $8.8 billion.

In part, investors are placing a bet on new CEO Sonia Syngal, who entered the role just as the pandemic hit in March. Syngal is abandoning malls in favor of e-commerce and strip mall locations. That means the closure of 350 Gap and Banana Republic stores which are failing to keep up. 

Evidently, Syngal has already made some impact. In Q2, Gap’s net sales were down 18%, but online sales had increased 95%. Of course, that jump in online sales is due largely to the pandemic. But clearly Sygnal has also been streamlining the way GPS does business. The new CEO says each store must “stand for something.” — for instance, Athleta focuses on athleisure and Old Navy on affordability. According to the Wall Street Journal, those two stores will represent 70% of sales by 2023. 

What’s more, Syngal is pushing her team to make fast, firm decisions — like the new “Yeezy Gap” line in partnership with Kanye West. Some ideas will work, others won’t. But if the company is not dependent on mall storefronts, it can make those calls with less risk.  

This shift in strategy sent the stock rocketing upward with long-term investors told to get on board. 

But I’m not so certain. You should pay a price to sales ratio of about 50 for a successful retailer. Right now, Gap isn’t one — yet. So, you can take a speculative shot on the company and hope it hits analyst projections, or invest elsewhere.  

Macy’s (M)

Gimbel’s is long gone. JC Penney (OTCMKTS:JCPNQ) is bankrupt. Altogether, the era of the department store seems to be coming to a close. So, can Macy’s survive? 

It should — but it needs a little holiday cheer right now. Actually, it needs a lot of cheer. 

For the first two quarters of 2020, Macy’s did a little over $6.5 billion in net sales. Before the pandemic, the company was the world’s largest fashion goods retailer. As of Nov. 19’s third-quarter release, the company did just shy of $4 billion in net sales. A year ago, that was about $5.2 billion.

In terms of earnings, the company can’t really talk. There aren’t any. Even before the pandemic, the numbers had been going down. Net income was almost $1.6 billion in fiscal 2018, $1.1 billion in 2019, and $564 million last year. If it could earn some money and achieve stability, Macy’s stock would be a tremendous bargain here. 

But there is the pandemic. Most Macy’s stores anchor shopping malls, but many malls have died and others are on life support. The stores shut when the pandemic hit and have only gradually reopened. And even those that have reopened aren’t doing much business.

So, Macy’s isn’t all dead. It’s just mostly dead. Since the beginning of November, shares have jumped 43% — M stock had been trading around $6 at the start of the month — now it’s trading at nearly $9.

For a turnaround, Macy’s is depending on its new CFO Adrian Mitchell, who’s planning to get through the holidays and conserve assets, then launch a new strategy. Right now, the company’s stores are doing curbside pickup as well as DoorDash delivery. It has also invested in Klarna, a Swedish fintech that enables installment purchases through an app.  

If Macy’s can get to the holidays 2021, investors buying the stock today could see spectacular gains. But you are also risking the company’s bankruptcy. So, if you’re betting on this pick of the retail stocks, don’t use any money that you can’t afford to lose.  

At the time of publication, Dana Blankenhorn held a long position in AMZN.

Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.