- Retail stocks are beaten down, laying several opportunities out for investors.
- Target (TGT): If Target maintains its pledge then it will build serious consumer loyalty for a long time to come.
- Albertsons (ACI): Downside is fully priced in already with plenty of growth expected.
- Lowe’s (LOW): Reaffirmed revenue numbers should reassure investors that Lowe’s is the homebuilding supplier to buy.
- Dollar Tree (DLTR): EPS numbers tell a strong story for the discount retailer.
- BJ’s Wholesale (BJ): Strong earnings and relative value make BJ’s a buy.
- Amazon (AMZN): The world’s largest e-commerce firm is deeply discounted following the tech wreck.
- Home Depot (HD): Tons of upside remains following unexpectedly positive results.
Retail stocks have seen better days. But the crash earlier this week has investors seeing opportunity as the sector receives attention on the bad news. The crash was led by Walmart (NYSE:WMT) and Target (NYSE:TGT), which were hit particularly hard by rising costs.
For its part, Walmart placed the blame on supply chain and employee costs. Retailers like Walmart had been able to increase prices and maintain strong results throughout the pandemic despite higher costs. In the first quarter, however, the company was unable to accurately forecast relevant factors, leading to lower than anticipated EPS figures.
Target similarly reported disappointing results also noting that fuel and freight costs would be $1 billion higher in 2022 than the firm had prior anticipated. It should be noted that Target has pledged to try and absorb those higher prices rather than raise prices at its stores.
The news may seem grim given that recession woes continue to rise as the pace of negative news seems to increase by the day. But there is a silver lining here.
|ACI||Albertsons Companies, Inc.||$28.75|
|LOW||Lowe’s Companies, Inc.||$184.03|
|DLTR||Dollar Tree, Inc.||$128.85|
|BJ||BJ’s Wholesale Club Holdings, Inc.||$54.32|
|HD||The Home Depot, Inc.||$285.10|
Best Retail Stocks to Buy: Target (TGT)
There is a reasonable, if risky, bet to be made on Target immediately following the weaker than expected results. And the reason to make that bet can be found in the company’s promise to customers in the face of rising costs: It is planning not to increase prices to raise profits as the firm knows customers are seeking affordability more than ever.
CFO Michael Fiddelke was quoted stating, “While we don’t like the impact to our profitability in the short term, we know it is the right thing to do for our guests and our business over the long term.”
Target now knows it has to play a bit of a long game. The idea is straightforward: Absorb those greater macroeconomic problems in its operations, reward customers with unwavering prices and build long-term loyalty. Given that TGT stock has fallen from $215 to $155 and is showing signs of resistance now is the time to buy.
Invest in Albertsons (NYSE:ACI) because all of the current negativity is fully priced into its shares. For one, ACI stock also took a hit as Walmart and Target pulled the broader retail sector down last week.
Second, Albertsons had already been moving downward since early April when the firm announced full-year profits might be slightly weaker than analysts had predicted. The point here is that the so-called weakness is fairly minor. The company forecast an earnings range between $2.70 and $2.85 for fiscal year 2022. That put the midpoint below the $2.81 consensus expectation, pulling prices downward.
But at the same time management also noted that same-store sales growth should reach 2-3% for the fiscal year, well above consensus expectations of 1.3% same-store sales growth.
The average target stock price sits at $35.65 with a high water mark of $48. That indicates upside between 24% and 67% if those analyst prices pan out.
Best Retail Stocks to Buy: Lowe’s (LOW)
Lowe’s (NYSE:LOW) is proving that it has strength despite widespread fear surrounding retail stocks. Yes, it did suffer following the retail stock crash last week. But it quickly rebounded. The broader news that Walmart and Target had disappointed carved a chunk out of the home improvement firm’s market capitalization that was quickly filled less than 24 hours later.
The net effect was that LOW stock dropped a few dollars, which could occur on a normal day with no significant news.
The reason for its strength relative to other retail stocks is clear: The company didn’t show any real weakness. In fact, EPS figures reached $3.51, well ahead of the $3.22 Wall Street had forecast for the North Carolina headquartered firm.
What should also interest investors is that Lowe’s reaffirmed its 2022 revenue outlook of between $97 and $99 billion and EPS between $13.10 to $13.60. Pundits are worried that rising interest rates will affect home improvement spending and house sales, and thus LOW stock, but this latest report seems to refute the notion that Lowe’s investor base will suffer.
Dollar Tree (DLTR)
There’s good reason to invest in Dollar Tree (NASDAQ:DLTR) ahead of earnings on May 26. The reason is that analysts haven’t wavered on the discount retailer stock even as things have gone sideways for the retail sector.
Here’s what I mean. Yes, DLTR stock did take a hit with share prices dropping from the mid $150s to the mid $130s on sector news. But at the same time, consensus per share earnings expectations are not wavering according to Yahoo! Finance. A week ago analysts were expecting Dollar Tree to post EPS numbers of $2.01 on May 26th. Those EPS expectations have since lowered a single cent to $2.00.
In other words, if investors were expecting Walmart and Target to negatively affect earnings for Dollar Tree, they may be mistaken.
Further, Dollar Tree has surprised investors in three of the last four quarters with EPS numbers that have well-exceeded expectations. The one exception was Q3 when the firm provided a 96-cent EPS that was exactly as expected.
Best Retail Stocks to Buy: BJ’s Wholesale (BJ)
BJ’s (NYSE:BJ) posted very strong numbers well above expectations on May 19. Both earnings and revenues were well ahead of where Wall Street expected them to be. The wholesale club posted an EPS of 87 cents, well above the 72 cents Wall Street was looking for. Likewise, the company’s $4.5 billion in revenue was well ahead of the $4.24 billion that was anticipated.
Club sales increased 14.4% during the quarter and 4.1% without the impact of gasoline sales.
Here’s the reason to buy BJ stock: It is showing that it can rebound quickly while its competitor Costco (NYSE:COST) has wavered. It seems that investors are interested in moving their capital toward BJ’s with its lower P/E ratio of 15.9 while Costco sports a P/E ratio nearly double that of BJ’s.
That implies that while Costco garnered lots of attention as inflation numbers spiked, BJ’s turn to receive an influx of capital may be at hand.
It’s no secret that Amazon (NASDAQ:AMZN) has fallen precipitously through 2022. During the so-called tech wreck, it has dropped from levels above $3,500 per share to current levels below $2,200.
As my colleague Dana Blankenhorn notes, you don’t lose anything if you don’t sell. His take is that Amazon has always been a long-term investment and that AMZN stock has every possibility of reaching those former highs again. So those who invested when prices were higher have little to fear if he is correct. Further, if Amazon retraces those former highs, there’s a ton of upside for those who purchase shares now.
His thesis is that Amazon’s cloud dominance all but ensures that a rebound will occur. He goes on to note that AWS, as a dominant cloud force, gives Amazon’s other businesses an innate advantage. He also asserts that AWS alone could be as valuable as the entirety of Amazon if it were forced to break up right now. That’s something to think about as AMZN stock continues to trade at low prices.
Best Retail Stocks to Buy: Home Depot (HD)
Investors should breathe a sigh of relief with Home Depot (NYSE:HD). Concerns of an ongoing slowdown in demand for home improvement are not coming to fruition based on earnings from the company.
In fact, Home Depot just reported its highest ever Q1 sales. That led to EPS figures of $4.06 where analysts were expecting $3.69. There’s more good news: Home Depot raised sales guidance for 2022 to 3% on the positive results.
Cooler weather had tamped down expectations for first-quarter results as home improvement activity was expected to slow as a result. Now is the time to buy as HD stock remains well below consensus prices and plenty of upside remains.
On the date of publication, Alex Sirois 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.