Although the novel coronavirus pandemic represented an initial shock to the system for all industries, the sector that absorbed significant lingering damage was retail stocks. With various government bodies imposing strict lockdown measures and a crackdown on non-essential activities, the incentive to go shopping declined significantly.

Finally, however, retail stocks have reason to cheer. True, consumer purchasing activity started rising as people gradually acclimated to the new normal. Further, as jurisdictions across the country began loosening Covid-19 mitigation protocols, consumers responded with more purchases — the so-called pent-up demand effect. But the latest jobs report provided strong fundamental justification for this consumerism.

According to data from the Bureau of Labor Statistics, total nonfarm payroll employment rose by 916,000 in March 2021, causing the unemployment rate to decline to 6%. It was a resounding report that blew past analysts’ expectations. Most of the job gains came from the leisure and hospitality sector as companies of all sizes (but particularly small businesses) opened their doors.

Generally speaking, retail stocks responded positively to the encouraging data. However, investors should be careful about diving into this sector. For one thing, the employment level compared to right before the pandemic (February 2020) is down 5%. As well, the personal saving rate on an annualized basis in February of this year is 13.6%, a still incredibly high rate.

Perhaps most worrying of all is money velocity, or the rate that each unit of currency circulates in the economy. This is down near all-time recorded lows, which suggests a deflationary environment. Also, this metric has been declining since the 1990s, which suggests systemic deflation. It’s good to have hope for these retail stocks, but don’t get too carried away.

On a last note before we get into it, I’d keep close tabs on economic developments. With all that has already happened — a pandemic, social unrest, geopolitical turmoil, supply chain disruptions — it seems as if the universe isn’t quite done teaching us a lesson. Therefore, be vigilant to the point of skepticism with these retail stocks.

• Big 5 Sporting Goods (NASDAQ:BGFV)
• Ammo Inc. (NASDAQ:POWW)
• Home Depot (NYSE:HD)
• Best Buy (NYSE:BBY)
• Nordstrom (NYSE:JWN)
• Costco (NASDAQ:COST)
• Dollar Tree (NASDAQ:DLTR)

Retail Stocks: Big 5 Sporting Goods (BGFV)

I never thought I’d lead off a list of retail stocks with Big 5 Sporting Goods, unless it was about a list to sell. Before the pandemic, the company was truly on the verge of collapse. Although you can’t make wholesale assumptions, millennials generally don’t care as much about outdoor activities as older generations. As you know, BGFV stock is basically an investment in outdoor activities.

But Covid-19 changed this dynamic. Many folks decided that being relatively secluded in nature represented the best vacation format during a pandemic.

Additionally, gun sales are another reason that BGFV suddenly looks attractive. The numbers that the FBI produced are shocking. Last year, nearly 40 million guns were sold, and in the first quarter of this year, the industry sold 12.4 million guns — that’s nearly the same amount that were sold in all of 2008!

Among retail stocks, Big 5 carries the strongest fundamental argument. That doesn’t mean you should load the boat with BGFV stock, but it’s a name to keep in mind as gun sales are only increasing.

Ammo Inc. (POWW)

A manufacturer of high-quality ammunition, Ammo Inc. enjoyed massive upside due to the coronavirus pandemic. Indeed, POWW stock bottomed out around the time when coronavirus cases started spreading in the U.S. Since then, it’s been largely an upward swing, punctuated by extreme boom-bust cycles.

Given the increase in gun sales recently, it makes sense that there has also been an increase in demand for ammo. This has caused rampant ammo shortages, with premiums on bullets that I’ve never seen in my life. It’s to the point where you’re better off not practicing at the shooting range because it’s just too darn expensive.

In fact, the shortage is so bad that law enforcement budgets may come under pressure if the situation doesn’t ease up. And while that may seem like bad news in general, it is good news for POWW stock.

Home Depot (HD)

One of the strangest circumstances that has affected the markets during this crisis is home sales. You’d think that an unprecedented pandemic, along with a total disruption to the global economy, would have people rethink their risk exposure. Yet the affluent took advantage of the cheap money environment, which then caused the masses to dive in.

Today, we’re seeing crazy bidding wars in the hottest housing markets in the U.S. due to a shortage of inventory. The lack of construction supplies isn’t helping matters either. All factors have resulted in the S&P/Case-Shiller U.S. National Home Price Index to shoot to its highest point. Further, the index gained 11.2% between January 2020 and January 2021.

This got me thinking — if you’re looking for retail stocks to buy, check out Home Depot. By no means is HD stock a sexy name, and it probably won’t make you rich. But with current homeowners recognizing the bidding war that’s taking place, it might inspire them to renovate their homes, which could boost Home Depot’s revenue.

Still, I don’t like what’s going on — housing seems like an unsustainable bubble, regardless of the inventory shortage situation. If you do buy HD stock for the housing boom, do so carefully.

Best Buy (BBY)

During the middle of the pandemic (assuming of course that we’re near the end stage), retail stocks had a dark cloud hanging over them. With so many options available online, there wasn’t much of an incentive to go out for non-essential activities. Still, we humans are social creatures. And hanging around the house made many of us stir-crazy.

Perhaps that’s one of the biggest ironies of Best Buy. Several years ago, many investors shunned BBY stock because the underlying company was essentially a showroom floor for e-commerce competitors. But the Covid-19 pandemic demonstrated how important person-to-person activities really are.

Maybe this is the reason why e-commerce as a percentage of total retail sales dipped conspicuously since its second quarter of 2020 high. We humans love interacting with others, even in the most mundane of activities.

Plus, it didn’t hurt that BBY stock is levered to relevant products. With the transition to remote work, this was a great time for folks to upgrade their in-home technology, especially if they intend to make a full-time transition to the gig economy.

Nordstrom (JWN)

I must caveat my inclusion of Nordstrom in this list of retail stocks that could potentially drive higher on an economic recovery. Personally, I’m hesitant of getting involved with department stores. I’m just not sure if Americans are ready to go out and about in public.

Still, what attracts me to JWN stock is the underlying Nordstrom Rack business, which is the company’s off-price store chain. During the worst of the Covid-19 crisis (assuming that the worst is not ahead of us), there wasn’t much of a point to shop at high-end apparel stores. Frankly, a lot of folks were doing video conferencing in their pajamas, so that presented a headwind toward retailers specializing in office apparel.

But if we have an economic recovery, that could change. Undoubtedly, companies will call their employees back to the office (and you better take that call, lest your job be outsourced). Cynically, this bodes well for JWN stock. However, you don’t want to bet too heavily on Nordstrom, since it’s still a very risky investment.

Costco (COST)

Earlier this year, Costco earned praise from many worker bees when management announced that it will raise its minimum starting salary to $16 an hour. However, as CEO W. Craig Jelinek explained, “I want to note this isn’t altruism.” Jelinek further went on to state:

“At Costco we know that paying employees good wages … makes sense for our business and constitutes a significant competitive advantage for us. It helps us in the long run by minimizing turnover and maximizing employee productivity.”

However, it didn’t make sense for stakeholders of COST stock and for American capitalists everywhere. In their view, they should lower the minimum wage so that Costco could hire more people or whatever is the latest grift.

While COST stock did take a hit following the salary spike announcement, shares have rebounded substantially. Now, we just need a robust economic recovery so that Costco can prove it made the right decision. Whatever happens, the company benefits from a very affluent consumer base. Therefore, if you’re going to bet on retail stocks, take a look at COST.

Dollar Tree (DLTR)

Throughout this write-up of retail stocks, I haven’t filled these pages with optimistic sentiment. Instead, I’ve urged caution more than anything. But if there’s one name in this sector that makes fundamental sense, it’s Dollar Tree. Specializing in low-cost items, DLTR stock could be the equity unit that rises above everyone else in five years’ time.

If you look at which businesses are doing the most hiring, it’s small, independent companies. The big boys are doing the least hiring, which is problematic because not enough high-paying jobs exist. Instead, as the BLS reported, restaurants and hotels opened back up, which typically offer low-paying jobs.

Moving forward, we may see a situation where the employment level recovers nominally but not on a wages-earned basis. That’s deflationary, which bodes poorly for retail stocks but just might spare DLTR in the long run. We’ll see.

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.