10 Retail Stocks to Buy (and Sell) in the First Quarter

retail stocks - 10 Retail Stocks to Buy (and Sell) in the First Quarter

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Although the novel coronavirus continues to wreak havoc on the U.S. and most of the world, there are some signs of optimism which may bolster the case for retail stocks to buy. As awful as the crisis is, humanity has never been completely upended by a pandemic. In other words, this too shall pass.

Of course, we are so much more advanced than we were when a similar-scale health outbreak last hit us, the 1918 influenza. Thanks to the unprecedented synergy underlining the Trump administration’s Operation Warp Speed, we now have several viable vaccine and treatment options. At some point, then, you’d expect coronavirus cases to decline, thereby supporting the bullish case for retail stocks.

In addition, you have the incoming administration of President-elect Joe Biden, which ushers in a return to traditional political governance. Furthermore, the Democrats secured pivotal victories in the Georgia runoff elections, essentially giving Biden a clear road to enact his agenda. True, this will likely cause rancor given the present divisive climate. However, a blue-run government may reduce congestion in pushing through popular stimulus measures – fundamentally a positive catalyst for retail stocks.

Despite encouraging implications, the broader retail ecosystem isn’t entirely conducive for companies within the sector. Recently, the jobs report for December was terrible, with the economy shedding 140,000 employment opportunities. As CNN Business pointed out, all the losses were attributed to female workers, signaling how disjointed the so-called recovery has been. In this case, retail stocks to sell make more sense.

One of the most worrying pieces of data is actually the record lows in credit card delinquency. But wait! How can low delinquency be bad? Ordinarily, it wouldn’t be. But it signals that consumers are unwilling to spend on discretionary items, which is a massive component of our economy. Therefore, you want to approach retail stocks on a case-by-case basis.

  • Amazon (NASDAQ:AMZN)
  • Walmart (NYSE:WMT)
  • Costco (NASDAQ:COST)
  • Home Depot (NYSE:HD)
  • Sportsman’s Warehouse (NASDAQ:SPWH)
  • Macy’s (NYSE:M)
  • Nordstrom (NYSE:JWN)
  • Gap (NYSE:GPS)
  • Dick’s Sporting Goods (NYSE:DKS)
  • Best Buy (NYSE:BBY)

Again, the point should be emphasized that not all retail stocks will suffer. For instance, e-commerce firms enjoyed a free marketing opportunity – and their gains may not be given up so easily post-pandemic. However, pure discretionary names could be under fire, which is what makes this sector a dichotomy.

Retail Stocks to Buy: Amazon (AMZN)

Amazon (amzn) LOGO ON THE SIDE OF A BUILDING.
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Do you hear that loud turbine-like sound in the background? No, that’s not a vacuum cleaner but rather, Amazon sucking away the last vestiges of small businesses in the brick-and-mortar retail segment. Among retail stocks, Amazon perhaps inspires the most confidence. However, it’s doing so in a remarkably cynical way. But if you don’t have a problem with it, AMZN stock is the one to have.

Sure, the company has been a stalwart, knocking out the competition like a row of hapless dominos. But with so much momentum, lingering fears of holding the bag on AMZN stock become more pressing. Certainly, anything is possible. But the main reason why I don’t believe Amazon is in bubble territory is because the company offers myriad products and services that cater to virtually all income levels.

As well, you just have to look at reality. Thanks to its inherently contactless nature, e-commerce has become an indelible component of the new normal. I don’t think this is going away post-pandemic, given how much progress has been made.

Walmart (WMT)

Walmart (WMT) logo on a store front
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Prior to the December jobs report, Wall Street anticipated an employment gain of 50,000 jobs, which was down substantially from the 245,000 job increase in November. Thus, you must put the actual December report into context. Not only did we not gain any new ground, but we went in the opposite direction by a startling margin.

I mean, up 50k is a stark miss from down 140k. Therefore, I think we need a rethink on the expectations of the economic recovery, which brings me to Walmart and WMT stock.

True, no one should panic based on a single jobs report. But again, because the miss was so bad, analysts may be overlooking the real pain on Main Street. Still, everyone has to eat and take care of their needs. Thus, if must have retail stocks in your portfolio, Walmart is it.

That applies even if you’re completely bullish on a recovery in retail stocks. The beauty of WMT stock is that it’s levered to multiple consumer revenue channels, from the necessities to the frivolous luxuries.

Costco (COST)

Costco (COST) logo on a sign on a Costco store. retail stocks
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In my opinion, Costco is one of the most obvious plays among retail stocks to buy. Not surprisingly, it probably doesn’t have the highest reward potential. The saying about everyone betting on the same horse applies to COST stock. Sure enough, at time of writing, it hasn’t had a particularly auspicious start to 2021.

However, what it lacks in outright appeal, COST stock makes up for it in terms of potential stability. As you know, Costco caters to a more affluent consumer base. The average shopper here has an income of $100,000. That’s well above the median personal income of just under $36,000 in 2019, according to the U.S. Census Bureau.

Basically, if we do suffer a prolonged recession – or even a depression – Costco shoppers on average (I know there are exceptions) will be the last ones impacted. As you saw from the movie Titanic, there are real benefits to being in first class on a sinking ship.

Home Depot (HD)

a Home Depot store is seen from the outside
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Based on the latest information from Sears Home Services that I came across, the popular narrative for Home Depot may be challenged. While I think HD stock offers investors a historically reliable exposure to broader retail stocks, you may want to consider Sears’ data carefully.

It finds that only 30% of Americans have not delayed home repairs. And of those delaying home repairs, 47% say it’s due to them falling into debt. Worryingly, one-in-five “Americans say their outstanding home repairs pose a risk of danger to their household.” On the surface, this doesn’t seem favorable to HD stock.

However, because President-elect Joe Biden has recently supported the cause for additional, more robust stimulus checks, Home Depot could enjoy contrarian upside. As Sears data states, “around 80% of respondents reported needing another stimulus check to cover their critical home repairs.”

They might get it under Biden. Of course, people doing the work themselves – that’s what YouTube videos are for! – save money. And that in turn supports HD as one of the retail stocks to buy.

Sportsman’s Warehouse (SPWH)

sportsman's warehouse (SPWH) app logo on a mobile phone screen
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Listen, nobody wants to talk about it, but whatever your personal convictions, I believe that every American must have a serious discussion with their family about firearm ownership. Over the trailing year, we’ve seen a number of criminal activities that have spared due to public demonstrations of outrage.

No, it doesn’t matter what the source of the outrage is, at least not when it comes to Sportsman’s Warehouse, one of the finest retail stocks in the firearms industry. Rather, Americans are angry. It’s almost as if a switch has gone off and people are ready to rumble.

Indeed, I have warned about the potential of mutually assured destruction on an individual scale on an interview with CGTN America. We may have crossed over into a point where every demographic is at each other’s throats. Cynically, this bodes well for SPWH stock.

But I also believe that Sportsman’s Warehouse and other firearms retailers are doing an essential public service. Law enforcement may not be able to help you in an emergency, which means more Americans will be interested in self-defense. That makes SPWH stock a higher-conviction play among retail stocks.

Retail Stocks to Avoid: Macy’s (M)

Macy's (M) logo on storefront in city with white sky behind. retail stocks
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Interestingly, recent analyst upgrades imply that Macy’s is one of the retail stocks to buy, not sell. Jefferies has a price target of $14 and let’s give credit where it’s due – at time of writing, M stock is trading at $12.28. So, my apprehension on the company has thus far not been warranted.

Further, the case for M stock doesn’t revolve around mere speculation, such as a haphazard application of the buy-low, sell-high mantra. If we’re being honest, many if not most of the speculators that apply this aphorism without discretion end up buying low and selling even lower. Rather, with Macy’s, the department store is implementing a turnaround strategy, which in part involves closing underperforming stores.

Will this move be successful? I don’t want to offend any Macy’s fanboys – is there such a thing? – but I’m not seeing it. As I stated in my analyst upgrades article, before the pandemic, many folks saw the uptick in storage unit demand as a sign of an incoming recession. But after a pandemic, we’re going to have a bull market?

It’s hard to believe but I’ll let you make the call.

Nordstrom (JWN)

A Nordstrom (JWN) storefront in Toronto, Canada.
Source: Jonathan Weiss / Shutterstock.com

If I were in the business of shorting retail stocks to sell, I’m relieved that I didn’t take a negative position on Nordstrom. Since the beginning of November of last year, JWN stock gained a massive 181%. Speculators were encouraged by the incoming Biden administration as well as the emergency approval and distribution of novel coronavirus vaccines.

But should prospective buyers consider JWN stock at this juncture? I’m not going to say you should short it as enthusiasm for what President-elect Biden can do – now that President Trump has conceded the race – may give the market a “bonus” rally. However, if you do make profits on it during the first quarter, you may want to punch out.

As I mentioned above with Home Depot, there are many pressing concerns that people will use for any funds, whether via stimulus checks or an improving labor market. Granted, Nordstrom caters to an affluent crowd. But these folks have been the least likely to spend money on discretionary items/services, making JWN a risky affair.

Gap (GPS)

A close-up view of a Gap (GPS) sign in the window of a Los Angeles, California mall. retail stocks
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When the Covid-19 pandemic initially disrupted American society, many apparel companies, including Gap, succumbed to severe volatility. But in the case of GPS stock, shares gradually worked their way out of the March doldrums. Not only that, Gap fortuitously became one of 2020’s surprising winners, returning speculators nearly 23% returns.

However, GPS stock has been shaky since late November, which I interpret as a signal that this is one of the retail stocks to avoid. It would be a different story if the country was getting ahold of the pandemic. But from the data that I’m seeing from the Centers for Disease Control and Prevention, the situation doesn’t look good. As well, many states have locked down non-essential businesses, adding to the economic pressure.

Fundamentally, this leaves a striking question: what’s the point of Gap or any other branded apparel store? It’s not as if people are out and about enjoying life. And buying branded clothing seems to be the least of anyone’s concern.

Dick’s Sporting Goods (DKS)

An image of a Dick's Sporting Goods retail location
Source: Jonathan Weiss / Shutterstock.com

Ordinarily, you wouldn’t think that a sporting goods retailer would be conducive for profits during a pandemic. However, it’s very likely that Dick’s Sporting Goods fed into the pent-up demand for outdoor and athletic activity. I can tell you firsthand that sitting at home all day in front of a computer isn’t exactly the healthiest endeavor. In that respect, I can understand why DKS stock has performed very well following the March doldrums.

At the same time, this might be one of the retail stocks to sell into strength. Unlike its rival Big 5 Sporting Goods (NASDAQ:BGFV), Dick’s has made it a point to eliminate firearms from its stores’ inventory. Of course, I understand the political nature of management’s decision. And while we can debate the merits, the bottom line is the bottom line: Dick’s is getting rid of a viable revenue machine.

Could that alone be a detractor for DKS stock? It wouldn’t surprise me since again, people are saving money like crazy. And when they do buy something, those purchases have a necessary component to them (such as self-defense).

Best Buy (BBY)

Image of Best Buy (BBY) logo on storefront during daytime. retail stocks
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Several years ago, Best Buy was seemingly on the brink of collapse. E-commerce, particularly Amazon, turned Best Buy stores into product testing floors for would-be consumers. However, they didn’t buy at Best Buy but rather, shopped around at various online marketplaces, securing the best possible deal.

Eventually, the company sparked a recovery initiative, focusing on the consumer experience and making stores a place to be (and buy). Therefore, BBY stock was able to compete in a world where retail stocks were increasingly levered to online channels. From a personal perspective, I enjoy spending time there (pre-pandemic, of course) – and the company has successfully extracted both primary and secondary sales out of me thanks to its generally excellent customer service.

Therefore, I’m not negative on BBY stock. But I also think we must respect the terrible economic landscape. And one of the key indicators to watch is the iShares TIPS Bond ETF (NYSEARCA:TIP). Its recent volatility suggests coming deflation, as the fund increases in value through rising inflation.

Well, deflation is hardly ever good for retail stocks, particularly those tied to discretionary purchases. Unfortunately, I must be cautious against BBY for now.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


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