The retail space has been on the mind of Wall Street the last several months as the trade war between the U.S. and China pose a serious risk to the overall economy and in particular consumer confidence and spending.
The tariffs that the U.S. and placed on China will lead to higher costs, and the longer it takes for the two nations to reach a deal the harder it will be for retailers to avoid raising prices, which in turn would hurt consumer confidence and bring weakness to the sector.
A lot of big retail stocks have shown weakness as uncertainty has grown, but at least at this time the overall economic landscape remains positive, and the earnings season has been a positive one for the retail space.
There are a lot of retailers trading at bargain prices and could make some major gains once strength returns to the overall sector.
Macy's (M)
Macy's (M) was already having a hard time gaining Wall Street's favor ahead of its mid-August earnings report, and a wide miss drove the stock sharply lower and shares are now trading just pennies above their 52-week low. With the recent drop, the stock is now trading at just 4.7 times earnings. The problem is that the company is expected to see earnings shrink 14.8% per annum over the next five years. Macy's is currently trying to turn its business around, and if it is able to start to show Wall Street improvements both in-store and online, the stock has a lot of upside potential. The stock is also yielding a massive 9.8% after the recent selloff. Management could move to cut the dividend, but that would be a worst case scenario for the company since there is already enough pessimism in the stock.
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Lowe's (LOW)
Home improvement goods retailer Lowe's (LOW) gapped 10% higher after it posted its most recent quarterly numbers, but even with the surge in price the stock is still trading at just 16.3 times future earnings. The recent quarter showed a 3.2% rise in same store sales, and the company stated that it expects its trade growth to continue to strengthen through the remainder of the year. Analysts expect the company is going to grow its earnings by just under 14% annually over the next five years, which makes its current valuation a true bargain. The company is also a dividend aristocrat with a 56-year streak of increases and the stock currently has a yield of 2.2%.
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Dollar Tree (DLTR)
Discount retailer Dollar Tree (DLTR) has sold off in August during the volatile market conditions, but as recently as mid-July the stock was trading at its 52-week high. DLTR is down 15.7% from its 52-week high, which has shares currently trading at just 15 times future earnings, and analysts forecast earnings to rise at an annual rate of 7.5% over the next five years. If the overall economy does run into trouble, and consumer spending is impacted, discount retailers will likely outperform the overall sector as consumers turn to their locations in order to trim their budgets as much as possible. DLTR's current valuation is a true bargain for this discount retailer.
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TJX Companies (TJX)
Off-priced retailer TJX Companies (TJX) reported in-line earnings on August 20 which failed to push the stock materially in either direction. TJX has traded sideways the last several months, and shares are currently priced at 18 times future earnings with profits expected to rise 8.7% per annum over the next five years after 11.3% annual growth the last five years. Discount retail will become very attractive to Wall Street if economic conditions deteriorate and consumer confidence starts to weaken. TJX is not just an attractive stock in weak economies, as the company has proven an ability to grow its business as a rapid pace while the economy has been strong. The stock is now trading at $52.86 with an average price target of $57.89.
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