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Zacks Equity Research

4 Retail Stocks with Value & Earnings Growth Potential


Trades from $3

The economy is definitely dealing with various micro and macro issues, including the upcoming Presidential election, uncertainty surrounding the Fed rate hike and other major events like the recent surge in the dollar and decision to curtail oil production to rein in falling prices. While a rebound in oil prices may sound good for energy companies, it may not augur well for consumers stocks.

All these factors can push the volatility button hard when they come into play. So play safe and do not let your blood pressure mimic stock market volatility. But before jumping to the strategy of how to safeguard your portfolio and look for lucrative counters to bet your bucks, let’s take a sneak peek at the economy and why the retail sector still holds the baton.

How Is the Economy Unfolding?

After a brush with the rough tide caused by the sluggishness witnessed in emerging markets such as China and Brazil, and fears of challenging economic/political conditions in Europe post Brexit, the U.S. economy looks much steady now. A clear answer to this was the GDP growth of 1.4% registered in the second quarter of 2016, far better than a 0.8% increase recorded in the first quarter.

Investors’ enthusiasm is further compounded by increased consumer confidence, which improved significantly in September. According to the recent Conference Board data, the Consumer Confidence Index increased to 104.1 in September from the August reading of 101.8, and is at its highest level since Aug 2007. Per the Labor Department, the economy added 156,000 jobs in September. Although not spectacular, this points to growth.

Given an improving labor market and the gradual rise in wages, we expect consumer spending to improve. Consumer spending increased 4.3% in the second quarter. The optimism over the health of the economy gets a further boost from the recent U.S. factory activity data and service-sector index. The Institute for Supply Management (ISM) stated that the index of national factory rose to 51.5 in September from 49.4 in August, whereas non-manufacturing index increased to 57.1 in September from 51.4 in August.

The above-mentioned factors underscore that the economy, which is heading toward its 58th Presidential election, is not devoid of momentum, and may help the Fed officials to reach a consensus over when to go for a rate hike.

Where to Locate the Greener Pastures?

The recent rebound in oil prices, improving labor market, and a gradual improvement in the manufacturing sector and housing market are signals that the economy is on a recovery mode, and undoubtedly the retail sector presents itself as a lucrative investment hub. These are playing key roles in raising buyers’ confidence.

We expect this positive sentiment to translate into higher consumer spending. Further, with the advent of the holiday season, the retail sector will hog all the attention. Thus, adding a few stocks from the space would be a prudent decision at the current juncture.

We suggest investing in top-ranked stocks – with a good value score and solid earnings growth potential.

What’s the Optimum Strategy?

Investment in stocks based on a diligent value analysis is usually considered one of the best practices. In value investing, investors pick stocks that are cheap but fundamentally sound. So the chance of these stocks allowing investors to book profits is high when the market trends upward. Thus, for long-term investors, a look at the intrinsic value of a stock is always warranted. So what are the criteria to identify value stocks?

A value stock may have a high dividend yield, low price-to-book ratio, low price-to-earnings ratio or a low price-to-sales ratio. However, it might be difficult for one to look at each parameter and compare with the peer group for an analysis on whether the stock is attractive from the value perspective. To make the task easy, Zacks has designed the new Style Score System.

The attractiveness of a stock as an investment option is confirmed by its Value Style Score of “A” or “B.” Our research shows that stocks with Style Scores of “A” or “B” when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best upside potential. Further, we have selected value stocks that have estimated earnings per share growth rate of 20% or more this fiscal year.

4 Prominent Value Picks

American Eagle Outfitters, Inc. (AEO - Analyst Report) , with a Zacks Rank #1 and a long-term earnings growth rate of 11.8%, is a solid bet. This specialty retailer of on-trend clothing, accessories, and personal care products has a Value Score of “A.” The Zacks Consensus Estimate too has trended upward over the past 60 days. The stock has estimated earnings per share growth rate of 20.5% for fiscal 2016.

To satiate your appetite further, we suggest investing in The Children's Place, Inc. (PLCE - Snapshot Report) , specialty retailer of children's apparel, with a Value Score of “A” and long-term earnings growth rate of 10.3%. The stock has enjoyed positive estimate revisions over the past 60 days and has estimated earnings per share growth rate of 30.4% for fiscal 2016. Moreover, it sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

You can also count on J. C. Penney Company, Inc. (JCP - Analyst Report) , one of the nation’s largest apparel and home furnishings retailers, with a Zacks Rank #1 and a Value Score of “A.” The stock has witnessed positive estimate revisions over the past 60 days and has a long-term earnings growth rate of 16%. It has estimated earnings per share growth rate of over 100% for fiscal 2016.

Another stock that you may consider is Sportsman's Warehouse Holdings, Inc. (SPWH - Snapshot Report) that carries a Zacks Rank #2 with a Value Score of “A.” This retailer of outdoor sporting goods has a long-term earnings growth rate of 15%. The company has also witnessed upward earnings estimate revisions over the past 60 days. Moreover, the stock has estimated earnings per share growth rate of 22.3% for fiscal 2016.

Bottom Line

Investors can confidently end their search at stocks with a better Zacks Rank status of either #1 or #2, which encompasses its strong fundamentals, promises price movement and highlights analysts’ constructive view on the same via positive estimate revisions. As we know, a sturdy portfolio always gives favorable returns.

Where Do Zacks' Investment Ideas Come From?

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