Down markets will always present opportunities for savvy investors. But few pundits are broadcasting their current buy lists, perhaps scared to stake a public claim and make a mistake. Nowadays though, investors have all the tools they need to do their own research to find diamonds in the rough.
The retail sector has been hobbled for years thanks to a decade-long beatdown courtesy one Amazon (NASDAQ:AMZN). But early adopters of e-commerce fared better than laggards. The current market crash has exacerbated previous stresses to do-or-die levels for many companies. Yesterday we learned that Macy’s (NYSE:M) will drop out of the S&P 500 and into the small cap index.
Three retail companies stand out for having done things right. Target (NYSE:TGT), Costco (NASDAQ:COST) and Walmart (NYSE:WMT) are the three best retail plays for the rebound. The goal here isn’t to find the perfect bottom, but to enter where you’re unlikely to regret it. And after a 30% correction, the odds of getting that entry wrong are much slimmer than, say, two months ago, when the markets were making new highs.
It’s easy for experts to stamp a stock “buy” when the trend is straight up. The challenge is overcoming fear like Warren Buffett to be greedy when others are fearful.
Retail Stocks On The Shopping List: Target (TGT)
Last year I wrote about Target’s strength relative to other retail stocks, a prediction that played out well for those who staked a claim. I hold the same assumptions for 2020.
During this horrendous market crash, Target stock is still above its 12-month pivot level near $90 per share. Compare that with the SPDR S&P Retail ETF (NYSEARCA:XRT) that has fallen back to 2012 levels with no bottom in sight. TGT stock should be at the top of the list for bullish investors.
Of the three retail stocks we’ll look at today, Target is the cheapest, trading at 15 times price-to-earnings and 0.6 times sales. It’s rare to find a cheap company whose stock still outperforms.
There’s also a technical reason to buy into the current dip. Once the stock lost the $110 level, it triggered a bearish pattern with a -$15 target scenario, which has already played out. There are many who doubt the value of technicals, but they’re an essential tool for modern investors. Risking money in the markets without even basic chart knowledge means placing yourself at the mercy of those who pay attention to them. The good news is that this crash worked it out so that TGT stock is now at a solid support zone.
The area around $90 per share has been a battle zone for TGT stock over the past two years. Both bulls and bears will want to fight hard to win the philosophical argument, creating congestion. On the way down, sellers overwhelmed the buyers. But this battle will bring that formula back into balance to form a trough.
Remember that the “bottom” is actually a process, not a moment, and so trying to nail the perfect entry point is futile. The idea is simply to buy low and sell high, and this is as low as Target stock has been in a while.
As the the novel coronavirus hit the United States and panic set in, consumers’ knee-jerk reaction was to hoard toilet paper, paper towels and disinfectants. Bulk retailer Costco saw massive lines as a result. This is somewhat ironic, given that shoppers put themselves in close quarters for hours in line, rather than social distancing. Nevertheless, shelves were bare in minutes. This process has repeated for weeks on end, though the trend has begun tapering a bit this week.
While most other businesses are shut down, stores like Costco are experience a massive spike in sales. P&Ls will probably be too murky to judge the future using short-term reports, meaning investors will need to use their best judgment to guarantee gains.
Luckily for us, Costco stock has a very reliable performance record, so you can count on it over the long-term. This is all a long way to say you should definitely buy COST stock on the biggest market dip in modern history.
To be clear, value is not the reason to catch the COST stock knife; it still has a 33 price-to-earnings ratio. However, it is now selling below its full year revenues. That’s just too cheap to pass up, especially for longer term investors. When the stock markets are higher in the future, Costco will also be higher.
Source: Charts by TradingView
The same hoarding sales spike we noted for Costco also applies to Walmart. Stores were mobbed and the shelves were picked clean. But beyond cleaning goods and the like, consumers also bought out most of the grocery section. So registers at WMT were singing a happy tune, and the P&Ls aren’t looking as terrible as millions of dormant companies out there.
However, looking past this period toward the future, we have to consider that much of this increase in sales now is pulling away from future sales. So we may be looking at a spike and then a consequent dip.
So for the near-term following this quarter, comparable sales may look terrible. Investors looking to buy in now should know this and be okay holding the shares through that downswing. This effect is smaller for COST stock, since the extra sales were concentrated on a handful of items. For that reason, I would prefer Costco stock over WMT here.
But for investors more concerned about value, Walmart is second-cheapest, with shares at 22 P/E ratio and 0.6 times full year sales. But sometimes cheap isn’t as important as the overall scenario.
For whatever reason, after the Christmas 2018 crash, Wall Street changed its sentiment towards Walmart. In 2019, they couldn’t buy enough of the stock. Case in point, WMT set a new all-time high just a month ago.
This dip brought Walmart stock back down to test the $100 neckline and it’s held above that level so far. This is encouraging and suggests that the zone below will be solid footing.
Corrections are beneficial in the sense that they shake out shareholders who aren’t firm in their conviction. This is to say that Walmart stock is a buy near $104. If you already own WMT stock, you can hold it confidently knowing that there will be buyers below.
Why I Am More Optimistic Than Most
The big question when trying to invest in a market crash is figuring out the bottom. In this case, we have an unprecedented setup where the demand crash is self-imposed. Soon enough, the world will go back to work and the switch will be set back to ON. These retail stocks are especially poised to benefit from the global restart.
Of the three today, Target stock is my favorite because it has the most ground to recover and from a better relative base.
Moreover, the sellers will have to not only fight the Fed, but also the White House’s $2 trillion relief package and the brilliant scientists combating COVID-19. Fed Chair Jerome Power recently said during a “60 Minutes” interview said that they had unlimited bullets. The White House also said it will do more as needed to restart the economy. The bulls have cavalry coming, so bears should be cautious.
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. Join his live chat room for free here.
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