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Retail Stocks Surge to 52-Week Highs: Is It Time to Buy?

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Stocks have enjoyed a nice start to the new year, with the more aggressive pockets of the market leading the charge. In the face of an economic slowdown and potential recession, a strong and resilient consumer (along with a January market rally) has sent individual retail stocks to heights not seen in over a year.

As new 52-week highs have proven to be great entry points in the past, is now the time to pull the trigger?

Based on commentary from earnings calls pouring over fourth-quarter results, we can conclude that households and businesses remain on solid footing. Consumer deposit balances are still well ahead of where they were prior to the pandemic. Spending growth remains strong, while a slight rise in consumer delinquencies is not alarming.

Adding to the bullish sentiment, inflation measures have been steadily coming down since the middle of last year. We’ve seen bond yields come down markedly from their peaks, helping to fuel a rally in both bonds and stocks. Later this week on Friday, we’ll get more on inflation with the release of December’s personal consumption expenditures (PCE) data.

Our proprietary Zacks systems and indicators are continually detecting leading stocks. Our Zacks Industry Rank system is backing up the data, as leading retail stocks have recently hit our buy list.

Positive earnings estimate revisions are at the heart of the Zacks Rank. Our research shows that rising earnings estimates are the most powerful force impacting stock prices. Only the top 20% of all stocks that are experiencing the most substantial revisions are ranked as either a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy).

The Zacks Retail – Miscellaneous industry currently ranks in the top 34% out of approximately 250 industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform over the next 3 to 6 months, just as it has over the past 3 months with a 21% return:

Zacks Investment Research
Image Source: Zacks Investment Research

Despite the impressive move, this industry remains relatively undervalued:

Zacks Investment Research
Image Source: Zacks Investment Research

Quantitative research studies suggest about half of a stock’s future price appreciation is due to its industry grouping. By targeting stocks contained within leading industry groups, we can dramatically improve our odds of success.

Let’s take a closer look at a stock that has recently surged to a 52-week high within this leading industry group.

Arhaus, Inc. (ARHS - Free Report)

Arhaus operates in the home furnishings market as a premium retailer and lifestyle brand. ARHS provides merchandise such as furniture, lighting, textiles, décor, and outdoor accessories. The company distributes its products through its showrooms, e-commerce platform, catalogs, and in-home designer services. ARHS boasts a network of over 70 showrooms, 5 design studios, and 3 outlets.

Despite a difficult environment for retail last year, ARHS surpassed earnings estimates in each of the past four quarters with an average surprise of 111.97%. The retailer most recently reported Q3 EPS back in November of $0.27/share, an 80% surprise over the $0.15 consensus estimate. ARHS stock is on a tear and has nearly tripled since bottoming in July of last year.

Analysts covering ARHS are in agreement and have raised earnings estimates across the board. Q4 earnings estimates have increased 18.75% in the past 30 days. The Zacks Consensus Estimate now stands at $0.19/share, reflecting growth of 35.7% relative to the same quarter in the prior year.

Zacks Investment Research
Image Source: Zacks Investment Research

What the Zacks Model Unveils

The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently witnessed positive earnings estimate revision activity. This technique has proven quite useful for finding earnings surprises – in fact, when combining a Zacks Rank #3 or better and a positive earnings ESP, stocks have produced a positive surprise 70% of the time.

ARHS is currently showing a positive ESP of 5.0%. Combined with a Zacks Rank #2 (Buy) rating, another earnings beat may be in the cards when ARHS reports fourth-quarter results on March 9th.

The strength in retail stocks reflects a resilient consumer. Make sure to keep an eye on leading retailers like ARHS as the group has been outperforming.  

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