No matter what sector you invest in, you’re buying the economy. If you want to make money it helps to know where the economy is going. The problem is economic statistics only tell you where the economy has been. The best way to see the short-term future is by studying companies and top stocks to watch, which serve the broadest, most important markets. They will tell you where to invest, maybe even whether to invest, in the broader economy.
If you’re looking for safety in your investments, these companies provide it. All have beaten the market averages in the last year. Today’s biggest retail stocks to watch are scaled enough to give a broad view of the demographics they serve. Their guidance about the future to investors, and their regular updates on their businesses, tell me a lot about what to expect for their suppliers and the general economy.
As retailing’s Armageddon has continued, the power of these retailers has only grown, magnifying their ability to clarify things. We go to stores not to shop, but to buy. We have a list. It’s how we shop the list, and whether we stray from it, that shows how we’re feeling. Right now, these retailers show we’re feeling fine. Growth is slowing, but it’s not reversing. There is no recession in sight. That may change, so watch this space.
The places we buy from are attuned to market changes, which they try to accommodate through their supply chains and store operations. They’re telling analysts exactly what’s happening. Listen to what these stocks to watch have to say no matter where you invest.
Stocks to Watch: Walmart (WMT)
If you want to know how the middle class is doing, look at Walmart (NYSE:WMT). In this decade Walmart has regained its status as America’s dominant retailer, fending off the challenge of Amazon.Com (NASDAQ:AMZN). While Amazon has failed to make it in physical retail, Walmart has moved into Amazon’s online world. Walmart’s product sales are now over twice those of Amazon, at $611 billion. Its online sales were up 7.3% last year.
Walmart’s recent success in e-commerce may overstate things just a little, but its quarterly earnings release and guidance accounts for that. Walmart said its U.S. sales rose 6.6% in 2022. It guided toward growth of about 2% for Walmart U.S. sales, with more growth coming from its international arm. These numbers indicate that growth patterns could reverse this year, with international business growing as Americans fight inflation with high interest rates. This is the kind of information that can guide your entire investment portfolio.
As a stock Walmart is a steady earner, delivering a gain of 58% over the last 5 years and a slightly rising dividend. The broader S&P 500 is up 46% during that time. Amazon, meanwhile, is up only 21% thanks to its horrible 2022, in which Walmart did not join.
In the past I accused Walmart CEO Doug McMillon of chasing after Amazon the way Captain Ahab did Moby Dick. After nearly a decade at the helm of the world’s biggest retailer, he may have finally caught it.
Stocks to Watch: Costco Wholesale (COST)
If you want to know how the upper middle class is doing, look at Costco Wholesale (NASDAQ:COST), another one of the top stocks to watch.
While Walmart serves a broad swath of American consumers, Costco is focused on the suburban upper middle class, people who usually own homes to store their purchases and drive an SUV to lug them home. The stock regularly outperforms that of Walmart, up 157% over the last five years. That’s reflected in the growing income gap between families in the lower-middle class and those in the upper-middle.
Costco also delivers some important information Walmart doesn’t, monthly sales numbers. Right now this shows slowing growth, with U.S. sales up 6.6% in January against 7.6% for the previous 22 weeks.(In February the trend continued, with U.S. sales up 5.7%. I have criticized Costco for slow online sales, and indeed they fell 15% in Jan. But I tend to overestimate the pace of change and American habits have returned to a pre-pandemic norm. That’s also important information for investors.
Costco’s margins are also important. Usually, the company’s profit closely approximates what they get from membership fees. In the last few years this hasn’t been the case, and in the most recent quarter profits were 42% higher than fees. That’s why analysts expect Costco to soon hike the fees, last raised in 2017. If you really want to know how the upper middle class is doing, watch how many drop their Costco memberships when the fees go up. Not many will.
Dollar General (DG)
Dollar General (NYSE:DG), based outside Nashville, is often disparaged as a store for the urban poor, a “dollar store” for “food deserts.” But under Jeff Owen, who replaced longtime CEO Todd Vasos last Nov., it’s also the general store for rural areas, places too small to support a Walmart.
The rural economy is doing just fine. Dollar General is America’s largest retailer by number of outlets, having recently opened its 19,000th store, in Missouri. Walmart has about 10,500 stores. In 2020 DG launched a second chain called Popshelf, home good shops aimed at upscale suburban neighborhoods. In some cases, the two stores are combined.
Unlike rival DollarTree (NASDAQ:DLTR), whose Family Dollar stores stock the same goods, Dollar Generals are attuned to local markets. If there’s demand for fresh vegetables, you’ll see them. In some states you will see beer, wine, or liquor. Over the last five years Dollar General has done as well as Walmart, the stock up over 150%. The dividend has nearly doubled, from 29 cents per share to 55 cents. I finally broke down and bought some shares for my retirement account. I’m glad I did.
Dollar General will announce its Christmas quarter, which ends in January, on March 16. Analysts are expecting earnings of about $3 per share, and revenue of about $10.25 billion. For its third quarter same store sales were up 6.5% year-over-year, and net income was up over 10%.
Home Depot (HD)
Home Depot (NYSE:HD) has become a barometer for the housing market. When it missed revenue estimates on Feb. 21 it took the whole market down with it. This was the first miss since 2019 and the chain also said sales for 2023 will be flat. Since announcing earnings, the stock is down 6.3%. But the company, founded in 1978, will be fine. It beat earnings estimates and is raising its starting salary to $15 per hour. The danger is it may be nearing the limits of its growth. There are over 2,300 Home Depot stores, along with over 90 distribution centers.
Home Depot has replaced The Coca-Cola Co. (NYSE:KO) as Atlanta’s chief “sugar daddy.” Former CEO Bernard Marcus built its aquarium and former COO Arthur Blank is behind a new children’s hospital. It has also replaced Coke as the founder of small fortunes. Since coming public in 1982 the shares have increased in value 5,000 times, delivering dividends that yield nearly 3% to new stockholders.
But it’s the company’s role in predicting the housing market that’s most important. Home Depot supplies contractors as well as homeowners. It’s the company’s strongest business line, 10% of the customers representing 50% of the chain’s sales volume. Management says consumers are buying experiences instead of do-it-yourself projects, but home remodeling is still going strong with professionals doing the work.
W.W. Grainger (GWW)
The health of the general business economy can be seen at W.W. Grainger (NYSE:GWW). The company was founded in 1927, went public in 1967, and has increased its dividend for 45 straight years. Last year was no exception, and the payout now comes to $1.72 per share. Over the last five years shares are up nearly 150%. The danger sign can be seen in Grainger’s Dec. quarter, with sales off 3.5% and net income down 10%. Analysts expect better things in the March quarter, sales up 7% and net income up 13% to $8.50 per share. If Grainger falls short when it reports April 27 that’s a bad sign for the general economy.
Grainger still has stores, usually hidden away in industrial neighborhoods. But it now does over 70% of its business online, with 85% of orders shipped directly to customers. Its Zoro Tools unit focuses on small customers while the main company handles larger orders. Grainger is a favorite holding among institutions, with 74% of the common held by them. It’s easy to see why, the stock up 42% in a year when the average stock lost ground.
Grainger is not a high growth stock, but like all the stocks in this gallery it’s a steady earner. It’s a company that doesn’t fail, although sometimes the economy may fail it. That’s what you want to watch out for.
On the date of publication, Dana Blankenhorn held long positions in AMZN, COST and DG. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. His 10th novel is The Time Tunnel, now available at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.