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5 Retail Stocks With Promise

The most recent numbers from the National Retail Federation (NRF) and the U.S. Census Bureau indicate that overall retail sales are improving. What makes this bigger news is that both of them are seeing improvement not only from the April lows but also from a year ago.

The U.S. Census Bureau notes that seasonally adjusted July retail sales were up 1.2% from June and 2.7% from last year.

NRF, which excludes automobile dealers, gasoline stations and restaurants, said there was a 1% increase from June and a 10% increase from July 2019. The three-month moving average for year-over-year growth was 7.1%, so it appears to be a strengthening trend.

The strengthening trend was mainly attributable to electronics, clothing/accessory and health & personal care categories also online/non-store sales and groceries were also up.

On a year-over-year basis, sales were up across online/non-store (25.8%), sporting goods (18.9%), building materials (16.1%), grocery & beverage (12.8%), general merchandise (3.1%), health & personal care (3.1%) and furniture (0.5%).

NRF Chief Economist Jack Kleinhenz provided encouraging commentary while adding a word of caution: “While households are spending, they are anxious about their health and economic well-being, so they are being pragmatic. The amount of uncertainty about forecasting is huge as we look toward the second half of the year, and what happens with the economy comes down to what the coronavirus allows us to do.”

COVID has reduced working hours for many and also rendered many jobless. So it makes sense to take a look at the disposable income as well. Accordingly, the Bureau of Economic Analysis report released on Jul 30 reveals that disposable personal income (DPI) shrank 1.4% in June while real DPI shrank 1.8%.

Two factors were in play here: the first being the lower level of government grants (compared to May), which hurt and the second being the continued reopening of the economy, which helped.  

The Consumer Confidence Index for August will be out this week. But in July, it was 92.6, down from 98.3 in June.

The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – improved from 86.7 to 94.2.

The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – decreased from 106.1 in June to 91.5 this month.

My take, from all of the above is that consumer spending is definitely coming back, but because the rate of recovery isn’t uniform across categories and consumers are understandably cautious about the risks of a resurgence in the virus, there is the need to take a cautiously optimistic approach. The retailers that are winning here are those that are able to work with digital interfaces, are able to minimize personal contact and those that are able to convince users that the safety protocols adopted by them are adequate. Then of course, there’s the question of the kind of product categories that are benefiting from the pandemic. Those would be electronics, cleaning materials, food, some auto, some categories of clothing/accessories, lawn and gardening, as well as general merchandise.

Given that backdrop, I’ve selected some stocks in the sector that carry a Zacks Rank #1 and VGM Score A, belong in the top 50% of Zacks-ranked industries, with at least 10% EPS growth expected in the current year and significant jump in estimates in the last 4 weeks, all at valuations below 52-week highs.

Tempur Sealy International, Inc. TPX

Tempur Sealy International, Inc. is involved in the development, manufacturing and marketing of bedding products including mattresses, adjustable bases, pillows and other sleep and relaxation products in North America and internationally.

Zacks Rank #1

VGM A

Industry: Retail - Home Furnishings (top 9%)

Expected EPS growth in 2020 35.91% on revenue growth of 11.14%

Expected EPS growth in 2021 20.03% on revenue growth of 7.88%

2020 and 2021 EPS estimates up a respective 53.89% and 31.13%

Americas CarMart, Inc. CRMT

America's Car-Mart operates automotive dealerships and is one of the largest automotive retailers in the United States focused exclusively on the Buy Here/Pay Here segment of the used car market. The company operates its dealerships primarily in small cities and rural locations throughout South and Central U.S., selling quality used vehicles and providing financing for substantially all of its customers.

Zacks Rank #1

VGM A

Industry: Automotive - Retail and Whole Sales (top 1%)

Expected EPS growth in 2020 12.86% on revenue growth of 12.16%

Expected EPS growth in 2021 16.99% on revenue growth of 6.10%

2020 and 2021 EPS estimates up a respective 12.06% and 11.82%

 

Target Corporation TGT

Target Corporation has evolved from being just a pure brick-&-mortar retailer to an omni-channel entity. The company has been investing in technologies, improving websites and mobile apps and modernizing the supply chain to keep pace with the changing retail landscape and better compete with pure e-commerce players. Its acquisition of Shipt to provide same-day delivery of groceries, essentials, home, electronics as well as other products is worth noting.

Zacks Rank #1

VGM A

Industry: Retail - Discount Stores (top 19%)

Expected EPS growth in 2020 11.89% on revenue growth of 7.26%

Expected EPS growth in 2021 7.48% on revenue growth of 1.54%

2020 and 2021 EPS estimates up a respective 44.34% and 15.07%

Lithia Motors, Inc. LAD

Lithia Motors is one of the leading automotive retailers of new and used vehicles, and related services in the United States. As of Dec 31, 2019, the company offered 28 vehicle brands across 181 stores in 18 states of the United States and its websites — Lithia.com and DCHauto.com. The core brands offered by Lithia Motors include Chrysler, General Motors, Toyota, Subaru, Honda, Acura, Ford, BMW, MINI, Nissan and Hyundai.

Zacks Rank #1

VGM A

Industry: Automotive - Retail and Whole Sales (top 1%)

Expected EPS growth in 2020 16.16% on revenue growth of -1.18%

Expected EPS growth in 2021 30.66% on revenue growth of 23.84%

2020 and 2021 EPS estimates up a respective 17.21% and 21.25%

 

Sprouts Farmers Market, Inc. SFM

Sprouts Farmers Market has a unique model that features fresh produce at the center of the store, an expansive bulk foods section, and a vitamin department focused on overall wellness. Moreover, the company has been diversifying its offerings to meet changing preferences of consumers looking for health and wellness products. These products are generally plant-based, gluten-free, keto-friendly and grass-fed. The company is focusing on natural and organic food, which is one of the fastest growing segments in the industry.

Zacks Rank #1

VGM A

Industry: Food - Natural Foods Products (top 19%)

Expected EPS growth in 2020 69.60% on revenue growth of 15.77%

Expected EPS growth in 2021 -20.55% on revenue growth of 0.12%

2020 and 2021 EPS estimates up a respective 22.24% and 7.28%

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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