With less than three weeks until Christmas, U.S. retailers are entering their busiest and most profitable part of the year. The Department of Commerce’s October retail sales report showed slight improvement over September, and a 4.1 percent growth rate year-over-year. Many analysts expect a strong retail shopping season this year, as declining energy prices provide a cushion to consumer’s wallets. We will be using Recognia Strategy Builder to search for well-valued U.S. retail stocks which may benefit from the upcoming holiday season.
We begin by setting a minimum market capitalization threshold of $5 billion to focus on larger, more established retailers in the U.S. market. Next, we will look for companies with reasonable valuations, based on their earnings yield and price-to-sales ratio. We will consider companies with earnings yields of 5 percent or more. Earnings yield is defined as a company’s earnings per share divided by its price per share, with higher yields being more attractive. As a further screen on valuation, we will select only companies with price-to-sales ratios of 2.0 or less. Price-to-sales ratio is a measure of relative valuation defined as a company’s share price divided by the revenue per share over the preceding 12 months. Price-to-sales ratio is often used to compare companies in similar industries for relative value.
Here is what we found:
Macy’s. The department store giant ranked high on our list, with an earnings yield of 6.7 percent and a price-to-sales ratio of just 0.79. Macy’s is the largest department store chain in the U.S., as ranked by retail sales. Macy’s reported good third quarter results on Nov. 12, with sales basically flat, but earnings per share up 15 percent year-to-date. Macy’s earnings increases are a result of improved efficiency and reduced costs. This bodes well for Macy’s ability to take advantage of a possible uptick in retail sales in the fourth quarter.
The Gap. It is a leading U.S. retailer offering apparel, accessories and personal care products under its Gap, Old Navy, Banana Republic, Piperlime, Athleta and Intermix brands. Unlike Macy’s, the Gap reported underwhelming third quarter results, with same store sales down 2 percent year-over-year. To try to turn things around, the company has chosen a new CEO, Art Peck, and has made a number of operational changes. The company is also increasing its stock buyback program, which should strengthen earnings per share in the coming year.
Bed Bath & Beyond. This domestic merchandise and home furnishings retailer has a somewhat checkered stock market performance over the past five years. After outperforming the broader market in 2012 and 2013, it struggled in the early part of 2014, before rallying in the second half of the year. The company has been very shareholder friendly, with aggressive share repurchases over the past four years. With an earnings yield of 7.1 percent, the company looks reasonably valued, and should be poised to benefit from an above average holiday shopping season.
Foot Locker. The footwear retailer has put in an outstanding performance in 2014, with its stock price up nearly 40 percent year-to-date. The company reported very good third quarter results in late November, with both revenue and earnings beating analysts’ expectations. The company looks reasonably valued at this point, with a price to sales ratio of 1.19 and an earnings yield of 5.8 percent.
Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had an 18.8 percent annualized return, compared to 13.4 percent for the Standard & Poor’s 500 index.
The above companies represent interesting investing opportunities in the U.S. retail sector as the holiday shopping season begins. Fundamental analysis of these companies suggests they are reasonably valued and that their stock prices may be poised to appreciate if they are to record strong sales in the fourth quarter.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is the vice president of retail and self-directed investing for Recognia, the industry leader in providing global retail investors with actionable insights to make confident trading decisions. Ashton is directly responsible for empowering the trading community of over 20 million investors to which Recognia is provisioned by ensuring all aspects of the company’s client service delivery, including the distribution of in-depth investment research culled from Recognia’s patented investing analytics.
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4 Retail Stocks to Watch This Holiday Season originally appeared on usnews.com
