On the surface level, the concept of buying retail stocks seems ludicrous. With both borrowing costs and inflation remaining stubbornly high, now’s the time to save money, not spend it. Yet as the revenge travel phenomenon demonstrated, pent-up demand represents a powerful catalyst. When Americans are denied certain activities, they’ll bounce back twice as hard to attain them.
However, some evidence seems to suggest that revenge travel is losing its luster. For one thing, publicly traded airline companies have faltered, largely due to the impact of the Hamas attack on Israel. Still, it’s also possible that the desire to vacation has waned due to burgeoning financial pressures. With so much going on, it’s not a great time to be profligate.
Also, the products underlying retail stocks offer more bang for the buck. For example, the “funflation” activities – going on vacation, attending Taylor Swift concerts – represent one-and-done deals. But physical goods can last a long time.
So, it’s possible that retailers could benefit from at least a short-term pivot. Are the below retail stocks due for a surprise comeback? Let’s find out – and remember, you can sound off on these and other ideas on my X account.
American Eagle (AEO)
An oddball idea to start this discussion about retail stocks to buy, American Eagle (NYSE:AEO) is a popular clothing and accessories retailer. Catering to the youth market, American Eagle initially benefitted from the other revenge catalyst: retail revenge. Unfortunately for the company, when revenge travel entered the stage, that was the signal to boot AEO off it.
Nevertheless, AEO has been on a strong recovery trek. Since the beginning of this year, shares popped more than 20%. Further, in the trailing one-year period, they gained 53% of equity value. And it’s not just a whimsical technical dynamic. Looking at its financials, the company maintains a strong gross margin relative to historical norms. Therefore, it doesn’t need to engage in costly promotions to drive up sales.
Also, options activity – particularly associated with big block trades likely made by institutional investors – suggests continued bullishness in AEO.
Nevertheless, it’s a risky calculation, with analysts pegging it hold.
Home Depot (HD)
I’m going to avoid continuing to stick my head out regarding retail stocks by mentioning Home Depot (NYSE:HD). Obviously, what I like about the home-improvement retailer is that irrespective of revenge travel – whether a rotation away from it materializes or not – the company will be relevant. More than likely, it’s permanently so. Unless you see concepts of building and renovation going out of style, HD should march steadily higher.
Now, in all fairness, Home Depot isn’t exactly attractively valued. However, in the past one-month period, shares slipped about 9%. While that’s worrying on many levels, for the contrarian, HD now trades at 17.27X trailing earnings. No, it’s not a steal by itself. However, at the end of fiscal year 2022 (which ends January), HD’s earnings multiple stood at 23.63x.
In that sense, it’s undervalued. Further, analysts seem to agree. Per TipRanks, Wall Street experts rate HD a moderate buy with a $348.04 price target, implying 26% upside. Therefore, it could very well be one of the retail stocks to speculate on.
Admittedly, Home Depot was a cheater’s idea – you can call me out on X. However, with Target (NYSE:TGT), I can definitely see how a rotation away from revenge travel could benefit the big-box retailer. As stated earlier, physical goods offer more bang for the buck. Plus, with the economy pressuring consumer sentiment, people are looking for better deals for their dollars.
Thus, in a counterintuitive sense, TGT could be one of the retail stocks to buy. However, the narrative will not be an easy one to bank on. Since the beginning of the year, shares fell more than 29%. In the past 365 days, TGT gave up 36% of equity value. Fundamentally, one of the negative catalysts centers on property crime. With Target grappling with shoplifting cases, management had to downgrade profitability expectations.
Earlier this year, I was bearish on TGT. Since then, however, an argument could be made that Target has become significantly de-risked. Enticingly, shares now trade at a forward earnings multiple of 11.9x. That’s lower than the sector median of 13.19x, adding weight to TGT’s moderate buy rating.
A classic case for retail stocks to buy, Costco (NASDAQ:COST) features multiple fundamental advantages. Primarily, I appreciate the company’s ability to weather the storm against inflation. Specifically, the nature of its open-warehouse retailer business inspires its members to purchase goods in bulk. By doing so, individual shoppers have a practical means to mitigate the pain of rising prices.
Another factor that works exceptionally well for COST stock is the financial health of its members. Generally speaking, Costco members tend to be younger, more upwardly mobile and generate more income than shoppers of competing big-box retailers. To be sure, this predictability comes at a cost: investors must pay a pretty premium.
Also, if you’re looking for a sexy play on the possible revenge travel pivot, Costco isn’t particularly exciting. However, its robust fundamentals imply that you can depend on continued profitability.
Analysts rate COST a consensus strong buy with a $602.50 target, implying 11% growth.
TJX Companies (TJX)
As a multinational off-price department store operator, TJX Companies (NYSE:TJX) might be the most balanced idea for retail stocks to buy amid a possible rotation away from revenge travel. For one thing, even if people continued to go out on vacations, they’ll likely want new threads. Hello, TJX! If not, the retailer offers last season’s fashion at very attractive prices.
Another fundamental element boosting TJX is the necessity factor. Yes, the enterprise operates largely under the consumer discretionary category. But try walking into a bank without your clothes on; you’ll quickly find out (the hard way, of course) why appropriate attire is, well, appropriate.
On the financial side, TJX saw revenue rise nearly 8% year-over-year to $12.8 billion for the quarter ended July 2023. More significantly in my view, gross margin popped to 30.16% from 27.63% in the year-ago quarter. This indicates that the company doesn’t have to kill its margins to boost sales, which is a huge advantage.
Finally, analysts rate TJX a consensus strong buy with a $100.39 target, implying over 15% growth.
Another obvious idea for retail stocks, Amazon (NASDAQ:AMZN) initially benefitted from the revenge travel sentiments tied to the pandemic’s disruption. With people left with little to do except quarantine at home, this naturally saw e-commerce as a percentage of total retail sales to hit a record high of 16.5% in Q2 2020. However, as Covid-19 restrictions faded, this metric dipped to 14.4% two years later.
Still, with inflation and overspending on vacations crimping the desire to venture out again into exotic lands, e-commerce is making a comeback. Specifically, the aforementioned metric now stands at 15.4% (as of Q2 2023). If spending continues to move toward the physical realm (as opposed to the social), Amazon could soak up a significant amount of those dollars.
Since the start of the year, AMZN has gained nearly 49%. Of course, that’s not all tied to retail. But with its wide canvas covering a range of relevant businesses, that theoretically adds more confidence.
Analyst peg AMZN a consensus strong buy with a $175.81 target, implying almost 38% upside.
I’m going to end this list of retail stocks with an extremely speculative idea. On paper, CarParts.com (NASDAQ:PRTS) represents an entity that should be avoided like the plague. Since the beginning of this year, PRTS slipped 45%. What’s worse, the negative acceleration has been intense even under a recent framework, with shares down over 16% in the trailing month.
So, what’s the bullish angle for PRTS? Fundamentally, the online provider of aftermarket auto parts and accessories may benefit from broader economic headwinds. Due to a combination of high inflation and high borrowing costs, people just haven’t been able to buy new (or new-to-them) cars. Also, many households can’t afford to make the transition to electric vehicles.
In terms of hard data, S&P Global Mobility shows that the average age of passenger vehicles on U.S. roadways hit a record 12.5 years. In theory, this dynamic should mean that CarParts.com enjoys a burgeoning total addressable market.
Analysts also rate PRTS a unanimous strong buy with a $10.38 target, projecting nearly 202% growth.
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.