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To Chase Or Not To Chase The Retail Rally, That Is The Question

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The retail apocalypse hit the fan in 2020 as foot-traffic halted and click-traffic surged. The retail sector has seen a massive divergence this year. Digital-inclined omnichannel retailers and e-commerce shopping platforms far outperformed the plummeting shares of legacy retailers.

With 2 high potential vaccines on the horizon, investors/traders are beginning to price foot-traffic back into the markets. There is now a light at the end of the COVID tunnel. The beat-up traditional retailer space has been catching a bid in the past couple of weeks as the equity markets move up the timeline to full economic recovery.

Despite the revived optimism about 2021, COVID cases have been surging, and we may be in for a cold economic winter, with states already beginning to lockdown again. Brick-and-mortar retailers are in for more pain before the end. The night is always darkest before the dawn, and this statement has never been truer than it is for traditional storefronts today.

COVID Winners

Omnichannel retailers like Home Depot (HD - Free Report) , Walmart (WMT - Free Report) , Target (TGT - Free Report) , Lowes (LOW - Free Report) , Best Buy BBY, and Costco COST are having a banner year, with these stocks all hitting all-time highs in the past few months. These retail giants have benefited from the pandemic as they took market share from the failing mom and pop shops on Main Street. Leveraging-digital technology has allowed these businesses to thrive amid the lockdowns with things like home delivery and curbside pickup.  

Pure-play e-commerce enterprises like Amazon AMZN, eBay EBAY, and Etsy (ETSY - Free Report) , as well as Chinese players like Alibaba BABA and JD.com (JD - Free Report) , have been clear winners of the pandemic. The world has relied on e-commerce platforms in 2020 more than ever before, with humanity locked in their homes. This reliance will not dissipate in the post-COVID world but continue to expand as the economy further digitalizes.

Investors have been rotating profits from some of these digital-inclined shopping stocks and into the underperforming brick-and-mortar retailers. Now the question is whether this move has merit?

The Underperformers

The retail apocalypse has been occurring for the past 5 years as the ease of shopping right from your couch has reduced foot-traffic levels in malls and shopping centers. This has been devastating for mall operators like Simon Property Group (SPG - Free Report) , as well as department stores such as Macy's (M - Free Report) , Nordstrom (JWN - Free Report) , Kohl's (KSS - Free Report) , and J.C. Penney, who filed Chapter 11 bankruptcy back in May.

J.C. Penney was not alone in filing for bankruptcy protection this year, with J. Crew, Nieman Marcus, and Brook Brothers all following suit as foot-traffic and cash-flows dried up.

I believe that the pandemic is cleaning house. Getting rid of antiquated business models that were on their way out already and allowing well-adopted retail businesses that provide what consumers want/need to thrive.

The retail underperformers are getting a vaccine-induced boost. Names like Gap (GPS - Free Report) , Macy's, Nordstrom, Kohl's, and TJX Companies (TJX - Free Report) all saw double-digit share price appreciation since Pfizer's optimistic vaccine announcement last Monday.

The only stock I would consider purchasing of this bunch is TJX, who just flipped positive for the year after an incredible quarterly release this morning. This business caters to the Millennial generation who love finding diamonds in the rough at TJ Maxx and Marshalls. The enterprise's Home Goods business has also been thriving this year. The segment illustrated double-digit year-over-year sales growth for the past 2 quarters, with home redecoration becoming a hobby for some.

Final Thoughts

Some value investors may argue that there is still opportunity in the 'heavily discounted' department stores. Still, I'm not chasing these antiquated names unless they can flip the obsolescence narrative and adapt to the rapidly changing consumer.

My focus remains on growth companies with a future that aligns with the next generation of consumers' values, aka Millennials and Gen Z's. Amazon, Alibaba, Etsy, and TJX are the retail stocks that I would stick with, and the recent pullback created a robust long-term buying opportunity. 

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