7 Retail Stocks to Buy If You’re Optimistic About the Economy

retail stocks - 7 Retail Stocks to Buy If You’re Optimistic About the Economy

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Following the initial onslaught of the novel coronavirus retail stocks were among the hardest-hit. As the pandemic rippled from coast to coast, panicked state governors shut down non-essential activities in a desperate bid to contain the outbreak. Naturally, there was only one place for businesses dependent on consumer sentiment to go: down.

However, thanks in no small part to the impressive vaccine rollout, retail stocks have once again shown signs of life. New Covid-19 cases have declined sharply from their peak levels in January of this year, enabling state governments to reopen. While basic mitigation protocols remain in effect, American society is gradually starting to feel like normal again. If the trend continues, this will bode very well for retail stocks.

Better yet, investors looking to bank off the return of commerce have excellent data to back up their optimism. In March, retail sales jumped 9.8% according to information from the U.S. Department of Commerce. According to a report from npr.org, “[t]he surge is being fueled by shoppers flush with cash from $1,400 dollar relief payments, and in some cases, by the feeling of newfound security from a fresh vaccine.” Again, this is a net positive for retail stocks.

Admittedly, though, it’s not all fun and games for the sector. Before you buy into retail stocks, you should note that the personal saving rate is near all-time highs as of the latest read. In my view, this represents deflationary risk as it suggests people are saving money for a rainy day. Further evidence comes from money velocity, which is down near all-time lows.

Still, you can make the argument that for the near to intermediate term, Americans are ready to regain some normalcy into their lives. And what could be better than good old fashioned retail therapy? Therefore, if you’re willing to stomach some risk, here are retail stocks you may wish to consider.

  • CarMax (NYSE:KMX)
  • Best Buy (NYSE:BBY)
  • Home Depot (NYSE:HD)
  • Amazon (NASDAQ:AMZN)
  • Denny’s (NASDAQ:DENN)
  • Signet Jewelers (NYSE:SIG)
  • Nordstrom (NYSE:JWN)

Despite many encouraging signs, you should keep in mind that our economic recovery is fragile. As I was writing this, I learned about the cyberattack on Colonial Pipeline, which could have severe implications on commercial activity depending on the extent of the damage. The point is that if you’re going to bet on retail stocks, please do so carefully.

Retail Stocks: CarMax (KMX)

a Carmax (KMX) sign on a storefront

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I don’t like to share anecdotal or personal observations as they tend not to be the strongest forms of evidence. Nevertheless, with CarMax, I’ll bet that you’ll find this observation quite insightful.

Over the last few weeks, I was looking to sell one of my cars. I had been using it as a beater and as an emergency option. However, since I have another beater, having two emergency options made no sense. With Covid-19 wreaking havoc on supply chains, suddenly, even my junkiest of junkers was worth some coin.

CarMax gave me an almost ridiculously high offer — much higher than what major dealerships offered. But I couldn’t sell on the day of my appraisal. Turns out, you need to wait for hours to sell your car and there’s a daily capacity limit that CarMax reaches all the time.

When I asked why I couldn’t sell it that day, I was told that due to tax season and the Covid relief checks, consumers are selling their old vehicles and getting into new ones. Frankly, I find this remarkable given the uncertainties of the new normal. Still, KMX stock has been killing it this year. Now you know why.

This is one of the retail stocks where you might not want to fight the tape. Demand is strong and may continue to be that way throughout this year.

Best Buy (BBY)

The front view of a Bed Bath & Beyond (BBBY) retail location in Indianapolis, Indiana.

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I might be seeing things. However, when you look at the technical chart for Best Buy between mid-February of this year until the present time, it certainly seems as if BBY stock printed a cup-and-handle formation. If my interpretation is correct, we’re still relatively early in this trading setup. This suggests that BBY is one of the more compelling retail stocks to consider.

Of course, you don’t want to rely on my interpretive abilities to determine whether you should take a shot. Therefore, I encourage you to look at its fundamentals. In the quarter ended January 31, 2021, the company generated $16.9 billion in revenue, up over 11% from the year-ago level. For the year, it rang up $47.3 billion, up 8% from the prior year’s tally. That’s impressive considering the pandemic’s disruption.

To be fair, many worker bees found a reason to purchase products from Best Buy during the lockdowns. First, there was necessity to upgrade their home office. Second, Best Buy provided retail therapy through entertainment offerings like video games.

Moving forward, pent-up demand combined with an uptick in the gig economy could make BBY among the more profitable retail stocks.

Retail Stocks: Home Depot (HD)

Home Depot (HD) storefront on a sunny day

Source: Jonathan Weiss / Shutterstock.com

Typically, when you think about pent-up consumer demand that will benefit retail stocks, Home Depot isn’t exactly what you have in mind. Instead, you’re more than likely thinking about discretionary retailers that offer products that people want to buy. PVC pipes and adhesives don’t exactly get the blood going unless you’re working in one of the trades.

Also, you’ve got consider the record-breaking surge for lumber. Global supply chain disruptions, along with unprecedented demand for real estate has contributed to an unprecedented situation where everything of significance has reached peak valuation. But that might contribute to sticker shock, which ordinarily wouldn’t be helpful for retail stocks.

However, these are no ordinary times. Despite some concerns, HD stock has soared. On a year-to-date basis, shares are up more than 28%, which is phenomenal for this investment category. Even more remarkable, many experts believe that HD could tick higher based on sustained housing demand.

Personally, I’m not sure if I believe this thesis. While it sounds reasonable, housing could be enjoying accelerated demand from forward years being pushed up this year. But when we arrive at those forward years, there might not be enough demand available.

Still, I like HD stock because of its everyday necessity. If God forbid the Covid-19 crisis worsens, this will be the name to own.

Amazon (AMZN)

Woman sitting on couch using tablet with "Amazon" on display.

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I hate to bring up Amazon because for one thing, I’ve been mentioning AMZN stock frequently in recent times. Plus, it’s presently not the upside performer that we’ve come to expect from the behemoth all-in-one technology firm. On a YTD basis, AMZN is down 1%. That’s much less impressive compared to the results we’ve seen in prior years.

Nevertheless, Amazon offers a fundamental argument that probably will never die. Every quarter leading up to the pandemic, e-commerce as a percentage of total retail sales never declined. Instead, consumers across the world have gradually shifted their purchasing behavior to online channels. Thus, in the first quarter of 2020, nearly 12% of all retail sales were attributed to e-commerce.

During the height of the Covid-19 pandemic, this metric shot up to 16.1%. With consumers afraid to go out, shopping at Amazon was the logical choice, making it one of the retail stocks to buy. However, the fading of new coronavirus cases took some air out of e-commerce demand, with the aforementioned metric fading to 14% in Q4 2020.

But I don’t think consumers will completely get over their fears immediately. For many, online shopping represents the prudent choice. And if the crisis somehow worsens, AMZN is perhaps best poised among retail stocks to deliver upside gains.

Retail Stocks: Denny’s (DENN)

outside of a denny's restaurant

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Out of the retail stocks on this list, Denny’s is probably the idea that’s most out of left field. You’re either going to think this is a genius concept or you’re going to want me to be institutionalized. Hopefully, I’ll get more of the former rather than the latter.

Okay — prior to the pandemic, what did young people do? Usually, enjoying the night life, hanging out with their friends and mixing and mingling with new folks. Of course, Covid put a major damper on this scene, shutting it down entirely. But now that many jurisdictions are reopening high-contact businesses, DENN stock could be a surprising beneficiary.

How so? For many people, nothing works out some of the drunken stupor better than a nice juicy double-patty cheeseburger with fries. It’s just what people do. And it’s not just about clubbing. Think about those who watch late-night movies. What else is open in the wee hours of the morning besides Denny’s?

Moreover, we’re going to see a lot of people vacation but via their personal vehicles. That means demand for roadside restaurants. By that I mean Denny’s. So actually, when you think about it, buying DENN stock isn’t out of left field at all. It’s rather quite normal.

Signet Jewelers (SIG)

A Kay Jewelers store inside a shopping mall

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If you’re looking for massive pent-up demand among retail stocks, look no further than Signet Jewelers. According to its website, Signet is the largest retailer of diamond jewelry, featuring brands like Kay Jewelers, Zales and Jared. Rising sales for diamonds has contributed to an amazing performance for SIG stock so far this year, gaining 110% since the January opener.

Admittedly, if you’re buying shares now, you’re going into extreme momentum. In other words, there’s a higher-than-normal risk that you may end up holding the bag. However, it’s very possible that SIG stock could keep moving higher.

First, you have to think about the revenge-spending concept. When Covid-19 struck, it didn’t just disrupt our professional lives but also our personal lives. Particularly, think about all the engagement and wedding ceremonies that had to be postponed because of the pandemic. Likely, many affected couples took the time off and the stimulus checks to splurge on their significant others.

Second, diamond demand is an international phenomenon. According to Diamonds.net, China is the second-largest market for diamond consumption. Further, well-heeled buyers there are acquiring large gemstones, which only serves to raise prices. Still, people are willing to pay the premium, which augurs well for jewelry-related retail stocks.

Retail Stocks: Nordstrom (JWN)

A Nordstrom (JWN) storefront in Toronto, Canada.

Source: Jonathan Weiss / Shutterstock.com

For full disclosure, I’ve been cautious about retail stocks levered to the department store business. I’d love to be proven wrong but if the Covid-19 crisis ends up permanently changing consumer behavior — and that’s not out of the question — you don’t want to be heavily exposed to this sector. Nevertheless, I’m going to explore the contrarian take of Nordstrom.

On the surface, Nordstrom and its shopping mall rivals are very similar. Both specialize in selling premium-brand goods at what I would consider hefty premiums. However, with the shift to e-commerce that only accelerated under the pandemic, department store businesses have a challenging road ahead of them.

But if there’s one that could navigate this minefield successfully, it might be Nordstrom. As you know, the company has an excellent off-price retailer called Nordstrom Rack. If you want to know, I used to go there to pick up discounts on high-end apparel.

During the crisis, I can see why people didn’t want to shop at the Rack. But now that companies are calling their workers back to the office, this business has a very compelling thesis: provide professional apparel at a cheap price.

Honestly, I don’t know if it’s going to holistically save JWN stock but it might be worth a shot if you’re a speculator.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2021/05/7-retail-stocks-to-buy-if-youre-optimistic-about-the-economy/.

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