Few industries have seen the same level of disruption in recent years as retail. But for astute investors who know where to look, retail stocks present some of the most compelling bargains our market has to offer.
So we asked three Motley Fool contributors to each find a retail stock they believe investors should be watching closely this month. Read on to learn why they chose Movado Group (NYSE: MOV), Party City (NYSE: PRTY), and Amazon.com (NASDAQ: AMZN).
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It might be time to snag this watchmaker
Steve Symington (Movado Group): Movado might not be the first stock many investors think of in the retail space, but there's reason to believe the watchmaker could be on the verge of a breakout with its fiscal fourth-quarter report expected around the end of this month.
After all, Movado shares initially soared after the company posted strong fiscal Q3 results in early December 2018, with better-than-expected 10% top-line growth driven by solid global demand for its owned and licensed brands. Movado also told investors it expects to begin integration of is recently completed acquisition of up-and-coming watchmaker MVMT -- a move that could help the company better appeal to a growing number of millennial shoppers -- by the end of the first half of this new fiscal year.
But Movado subsequently gave up those gains as the broader market pulled back hard to end the calendar year, and the stock has largely traded flat in the months since. If the company's impending quarterly results show it managed to sustain the momentum of its underlying business through the crucial holiday season, it could be exactly what the market needs to see for Movado stock to finally respond in kind.
This ultra-cheap stock is up in the air
Anders Bylund (Party City): The leading seller of party supplies is suffering from a unique shortage of raw materials. Helium may be the second most plentiful element in the universe, but it's also one of the lightest and doesn't form molecules easily with heavier atoms. Hence, the helium we use ends up floating into space, never to be seen again. There is no economically efficient way to manufacture the gas, so the bulk of the worldwide helium supply is a byproduct of natural gas extraction.
The problem is, helium is being used up faster than it can be produced these days. Party City is not a huge contributor to that trend, since most of the global consumption goes into cooling down medical devices and cleaning rocket fuel tanks. But a company whose revenue relies on selling helium-filled balloons does suffer from the shortage. Helium shortages fluctuate over time and across geographical markets, but anywhere between 50 and 200 of Party City's 850 stores don't have any helium in their tanks at any given time.
Market makers have punished the stock for this obvious shortcoming. Party City's share prices have fallen 43% lower in the last six months and are now trading at just 6.8 times trailing earnings or 0.8 times the company's total book value. In other words, investors see more value in selling off Party City's assets than in running the actual business.
That's a big mistake.
We're still looking at a healthy business. Party City's revenue rose by 2.3% in 2018 despite the emerging helium issues, stopping at $2.43 billion. Gross margins held firm at 41% and the company produced $357 million of EBITDA profits. This is not a company on the verge of filing for bankruptcy, but that's what its share prices appear to be based on.
So while Party City's management wrestle with the helium supply and try to come up with other sales tactics for its party balloons, the business is in no danger of going belly-up and the stock looks much too cheap.
Keep it simple and pick the leader
Chris Neiger (Amazon): If you're looking for a top retail stock there's no need to sift through a laundry list of under-the-radar plays -- just stick with the current leader.
Amazon will generate an estimated $440.8 billion in retail sales this year -- up about 20% from 2018 -- according to eMarketer. If you're wondering how that compares to other retail stocks, consider that Amazon will account for about 47% of all retail sales in the U.S. this year. And it's not just in the U.S. where Amazon is doing well, at the end of 2018 the company accounted for more than 13% of worldwide retail e-commerce sales.
The beauty of Amazon's business isn't just that the company has the largest e-commerce platform in the U.S.; it's the fact that its yearly Prime membership subscription keeps customers tied into its ecosystem and makes it easy for them continue making purchases through Amazon's website. The company said last year that it has more than 100 million Prime members now and as the company continues to add more value to the membership (through more original movies and television shows), it's likely that these members won't be leaving anytime soon.
It's also worth mentioning that while other retail stocks are vulnerable during economic slowdowns, Amazon makes the majority of its earnings from its cloud computing platform (called Amazon Web Services). This means that if retail stocks take a hit as consumers back off their spending, Amazon can ride out the rough patch because its AWS business has nothing to do with retail.
So if you're looking for a stock that's dominating retail, yet can weather the retail industry's volatility much better than its peers, there's no better choice than Amazon.
The bottom line
We certainly can't guarantee that any given retail stock will go on to climb and beat the broader market in the process, particularly given today's fast-changing retail landscape. But whether we're talking about strong demand for Movado's wares, Party City's surprisingly healthy underlying business, or Amazon's continued dominance of the retail industry, we believe they could be poised to do just that. And we think investors could do well to put their money to work accordingly.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anders Bylund owns shares of Amazon. Chris Neiger has no position in any of the stocks mentioned. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.