3 Retail Stocks to Buy Despite All the Fearmongering
The stock market has been in turmoil for weeks. We have had sellers in control of the equity market mainly because of two reasons. First, the tariff war with China. The January deadline is getting closer at which time the 10% rate will soar to 25%. Second, investors are nervous that the new Federal Reserve chairman Powell is dead-set on raising rates regardless of the state of the economy. We also have the U.S. elections next week. Any of these scenarios could cause a ruckus in the stock markets.
This week we finally strung along two green days in a row and today is working out to be perhaps the third. So even though caution is still warranted, there are opportunities for upside potential.
We are entering into the holiday season, so after this correction, retail stocks are well set up going into it. Furthermore, consumer spending trends are still very healthy, so retail companies should do well on the top line. Managing the P&Ls will be the challenge; there’s likely to be supply chain disruption due to the tariffs that are already in place.
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But the winners will continue to win. Here are a few bright looking retail stocks to buy as the holiday season begins.
Best Buy (BBY)
Source: Austin Kirk via Flickr
Best Buy (NYSE:BBY) is set to have a good holiday season. After all, we all want tech toys. They are the last-man-standing so to speak. So they have no physical competition. Shoppers who want to experience physically the tech they seek have to go to Best Buy.
Fundamentally, the stock is cheap selling at a price-to-earnings ratio of 15, which means owning it for the long term is not likely to be a financial catastrophe. But technically, BBY stock needs to hold its recent lows. Otherwise, if it loses $67 per share, the bears could push it down 11% lower to its next pivot level.
Amazon (AMZN)
Source: Via Amazon
Amazon (NASDAQ:AMZN) is the king among retail stocks. This is a stock that crippled the whole industry and it took its opposition over a decade to start recovering. Accordingly, any bet on the retail sector would have to include AMZN stock.
It is not cheap at a P/E of 98. But so far it has been worth it. Those who have held it for the long term have profited well from Amazon stock. This is likely to continue and I want a piece of it. After a 20% correction here, I bet that holding it for the long term will be an extremely profitable proposition.
However, investors should note that this is a momentum stock and these are difficult to trade, as they rarely give us a clear point of entry. So one has to take a few positions at a time where it seems that it has shed weak hands out.
Ulta Beauty (ULTA)
Source: Mike Mozart via Flickr
Ulta Beauty (NASDAQ:ULTA) is the third retail stock I picked today. It was a toss-up between ULTA stock and Lululemon (NASDAQ:LULU). But I chose ULTA because it has been a winner in the long term without the potential of a fad tied to it. Like many other retail stocks, Lulu could be tied to current trends. But makeup — Ulta’s specifically — is a daily necessity for billions of people.
ULTA stock held up very well in the face of the recent adversity the market has experienced. In fact, it is only down 5% from recent highs. This general strength speaks loudly of ULTA stock owners, as they demonstrated the strength of their belief in the company’s staying power. I also believe in the stock, and I think if the stock markets are to recover from here, ULTA stock will be higher into next year.
Fundamentally, it sells at a P/E of 25, which is reasonable, given that it’s almost half of Lululemon’s P/E. From a technical standpoint, ULTA stock has support around $260 per share, so the bulls have a decent platform to rebuild the momentum into next year.
The Bottom Line on Retail Stocks
Given all the uncertainties that still hover above the stock market, I would not take any immediate full positions in any of these retail stocks, regardless of how attractive they may be. As cautious investors, we owe it to our selves to add positions in tranches to keep our portfolios in balance. Going all-in at once, especially when entering three stocks in the same sector is reckless.
Retail stocks and those from other sectors, look cheap now, but they can get even cheaper. And all of that can happen quickly. Lately, we’ve seen evidence of this as a single headline –fake or real — can roil markets down hard. So, ultimately, when you consider all the risks involved with investing, I’d suggest only betting what you can afford to lose.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
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