For the longest time, I’ve always assumed that the term Black Friday referenced the profitability narrative; that is, transitioning from being in the red to black. But I just got fact-checked by Britannica. Instead, police officers in Philadelphia in the 1960s used the phrase to describe the chaos as suburban tourists began their holiday shopping. Whatever the case, this year’s version will be unique, signaling an opportunity in retail stocks.
How so? Due to the global supply chain disruption, seemingly every product that we import has declined in inventory, thereby becoming precious commodities. And as CNN explained, the situation is about to get a lot worse. Per a Moody’s Analytics report, “what is increasingly apparent is how [the global economic recovery] will be stymied by supply-chain disruptions that are now showing up at every corner.” Basically, this is your excuse to buy retail stocks.
Now, it’s not an entirely green light. “Indeed, the IMF downgraded its 2021 US growth forecast on Tuesday by one percentage point, the most for any G7 economy. The IMF cited supply chain disruptions and weakening consumption — which itself has been partially driven by supply chain bottlenecks such as a lack of new cars amid the computer chip shortage.” But the circumstance bodes well for retail stocks nearer term.
That’s because consumers can’t do anything about the situation obviously. Therefore, they have to adopt a my-family-over-yours mentality, which (don’t get angry) shouldn’t be that difficult for many Americans. So you should expect at minimum people to rush in to whatever retailer they can to purchase whatever is available.
Beyond that, this year’s Black Friday will be unique because it has basically already started. As a recent USA Today article implied, if you’re reading these words, there’s a good chance you may be running a bit late with your holiday spending plans. Sure, you may miss out on some deals but it’s better to get in now before supply truly dwindles. Of course, that’s a huge catalyst for these retail stocks.
- Amazon (NASDAQ:AMZN)
- Nordstrom (NYSE:JWN)
- Big 5 Sporting Goods (NASDAQ:BGFV)
- CarMax (NYSE:KMX)
- Square (NYSE:SQ)
- Target (NYSE:TGT)
- Wayfair (NYSE:W)
As with many investment ideas, the narrative for retail stocks to buy depends heavily on the headlines. However, keep in mind that no one knows for sure when this supply crunch will end. Therefore, please practice careful money management before trading these ideas.
Retail Stocks to Consider: Amazon (AMZN)
In light of the social equity movement and a fairer framework of wealth distribution, Amazon isn’t exactly climbing the rungs of the ESG (environmental, social, governance) ladder. Countless stories about unsafe, grueling conditions dominated the headlines even before the novel coronavirus pandemic. Of course, the Covid-19 crisis only made matters worse, drawing arguments that Amazon workers are treated like robots rather than human beings.
It puts those stories about generating multiple income streams through the e-commerce marketplace in perspective, doesn’t it? Well, for this year’s holiday shopping season, I’m not sure it’s going to matter. True, AMZN has been trading relatively rangebound over the trailing year. Still, with retail stocks poised to go bonkers because of the supply crunch, it’s a name to consider.
Undoubtedly, millions of consumers will fail to get the message that they need to start shopping ASAP. Witnessing empty shelves even for the most mundane of products — toilet paper again!? — people will invariably shift their shopping online. So, we’re going to have to push back this social equity discussion some other time, for better or for worse.
Prior to the Covid-19 pandemic, one of the main talking points regarding retail stocks was the death of the shopping mall. Due to a powerful combination of the lingering impact of the Great Recession along with the rise of e-commerce, these headlines weren’t exactly hyperbole. As well, the pandemic itself has worsened the fallout for several malls.
So, if it weren’t for the coronavirus and the subsequent supply chain disruption that it caused, I’m not sure if I would include department store Nordstrom in a list of retail stocks to buy. Generally speaking, analysts regard JWN as an anachronistic investment, something more aligned with the era of tethered content entertainment.
But these aren’t normal times. For instance, Nordstrom caused quite a stir when it announced recently that it’s looking to hire 28,000 seasonal and regular employees to gear up for the holidays. Normally, that wouldn’t be the brightest move. However, because of the widespread impact of Covid-19, there’s a good chance that it will be a mini-Black Friday everyday as we head closer to the holidays.
One other note: retailers will probably not bother discounting too heavily and they know they can get away with it due to the supply shortage.
Retail Stocks to Consider: Big 5 Sporting Goods (BGFV)
As someone who has only ventured into a handful of states, the middle part of America might as well be North Korea. So I’m not entirely sure what life’s like there other than to say some regions have a very warm relationship with firearms. Over on the coastal (read blue) areas, asking for a 12-gauge shotgun for Christmas would probably net you a visit from whoever enforces the see-something, say-something protocol.
But lately, buying firearms has become much more acceptable amid the social turmoil that the pandemic caused. Further, with negative sentiment directed toward law enforcement officers, the underlying message was that you need to protect yourselves because the police might not get to you in time. Cynically, then, Big 5 Sporting Goods — one of the retail stocks destined for destruction but saved (ironically) by guns — looks enticing.
In addition to shotguns and bolt-action rifles, Big 5 stores also sell one of the hottest commodities: ammunition. In fact, the Baltimore County Police and other law enforcement agencies are reporting ammo shortages. Unfortunately, some experts in the firearms industry sees the ammo shortage lasting for years due to exponential demand.
If you check YouTube, you’ll find plenty of videos earlier this year of various pundits urging people not to buy used cars. If you look at used car price trends, you’ll notice that the dip occurred in February. In hindsight, that was the time to buy. As YouTubers urged people to wait, the price just kept moving higher and higher. Further, a Forbes article suggests more pain might come:
“There’s no obvious reason right now, to expect high used-car prices to moderate significantly any time soon, probably not through the first quarter of 2022, and it could be 2025 or even later before used-vehicle supply and demand return to normal, according to Cox Automotive.
‘There’s a very low probability of prices being lower than they are right now, between now and the end of tax refund season,’ in 2022, said Jonathan Smoke, Cox Automotive chief economist, in a webinar Sept. 30.”
Unfortunately, YouTube isn’t always the best place to get advice. But one company that’s enjoying the surge is CarMax. Earlier, I thought KMX was going to correct sharply but that looks not to be the case. Therefore, this is one of the retail stocks to consider if you believe consumers will simply bite the bullet.
Retail Stocks to Consider: Square (SQ)
Admittedly, Square doesn’t exactly qualify as a member of retail stocks. However, the company is inextricably tied to the sector, particularly within the small business subsegment. By providing payment processing solutions and business management solutions, Square helps even the playing field for individual entrepreneurs against their larger rivals.
Moreover, Square is one of the companies that benefitted from the Covid-19 pandemic. While SQ did suffer an initial hit during the doldrums of 2020 — as did of course other retail stocks — shares quickly rebounded and then skyrocketed. One major catalyst is the transition to a cashless society. It has been happening before the pandemic but the global health crisis has only accelerated the trend.
Moving forward, Square could again be a beneficiary from a Covid-related catalyst. With the supply chain disruption devastating on-hand inventory for companies across multiple industries, consumers will not let perfect be the enemy of good. That is, no point exists in fussing over the perfect gift when something good enough will do. Such a circumstance will likely lift small businesses, providing downwind gains for SQ stock.
With retail stocks in focus, you’ve got to imagine that some of the biggest beneficiaries will be the big-box stores. My personal favorite is Target — it’s convenient, it’s got variety and it’s not Walmart (NYSE:WMT). And every Black Friday, it’s pure madness in the store. But something tells me that this year will be much different from the others.
I’m sure people will still bargain hunt so Black Friday 2021 should be an interesting event, if only from a sociological perspective. But the bigger issue is that shoppers this year can no longer afford to wait for a particular day to get their shopping done, not if they want to keep little Johnny and Suzie happy.
Now that I think about it, this year could set the record for most violent Black Friday ever.
On a pound-for-pound basis, Target is probably poised to enjoy the blackest of Black Fridays too. Consider that pre-pandemic, the company builds up inventory in the fiscal first and second quarters leading into Q3, all to set up the critical Q4. Compared to historical norms, however, Target is well below the pace.
To me, that translates to higher profit margins for whatever inventory they have, which should at least please TGT shareholders.
Retail Stocks to Consider: Wayfair (W)
With Wayfair, I’ve saved what I consider to be my most uncertain idea for retail stocks to buy for last. As you know, Wayfair has been one of the most remarkable post-initial-Covid-attack plays, soaring to all-time highs as people began buying homes in earnest. That of course was helped by the fact that many companies (at least back then) allowed remote work.
Today, many of those companies could recall their employees. In addition, Jefferies recently downgraded W stock, warning investors that there could be an “air pocket” for the equity unit. To be completely honest with you, I’m not entirely sure what the research firm means by air pocket because I’m too cheap and the article is hiding behind a paywall.
That said, W stock has been pinging red ink, down 12% in the trailing month since Oct. 13. However, it’s also possible that this could be a consolidation pattern shaking out the weak hands.
Remember, a combo of booming furniture sales and the worsening global supply crunch has translated to significant delays for sofas and desks. Since demand is still strong, Wayfair could be resting toward another leg higher.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.