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4 Undervalued Retail Stocks With Earnings Growth Potential

Sumit Singh
Earnings yield is handy for comparing the performance of the market with the 10-year Treasury yield.

"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price." — Warren Buffett. Smart investors often consider value style as one of the most-effective approaches. In value investing, the focus is on stocks that are trading below their inherent worth but are fundamentally sound.

An investment decision based on the intrinsic value of stocks seems feasible in an economy that is coping with waning consumer confidence, Brexit and slowing global economic environment. Definitely, these raise concerns. However, efforts to resolve the U.S.-China trade spat, the Fed’s dovish stance and increase in construction spending for the third successive month in February sounds good.

Given the current market scenario, adding a few top-ranked stocks with a favorable Value Score and solid earnings growth potential seems prudent. Among the 16 Zacks sectors, we are focusing on Retail & Wholesale.

Why Retail Sector?

A strong labor market and gradual wage acceleration are favoring the Retail & Wholesale sector. The space seems to be faring better when compared with a host of other sectors, at least in terms of earnings and revenues. This is clearly visible from the picture unfolding for the first quarter of 2019.

Per the latest Earnings Preview, the sector is likely to register top and bottom-line growth of 7.3% and 2.9%, respectively. On the other hand, total S&P 500 revenues are envisioned to improve 4.6%, with earnings expected to decline 4%.

The report also suggests that the sector is likely to continue its momentum going forward with growth expected on both ends in the remaining three quarters. Consequently, revenues and earnings are projected to increase 8% and 6%, respectively, in 2019.

4 Prominent Picks

We have shortlisted stocks on the basis of a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Value Score of A or B. Further, the Zacks Consensus Estimate for earnings portray growth rate of 10% or more for the current fiscal year.

We suggest investing in Abercrombie & Fitch Co. ANF with a long-term earnings growth rate of 15.3% and a Value Score of B. This specialty retailer delivered an average positive earnings surprise of 88.3% in the trailing four quarters. The stock, which sports a Zacks Rank #1, has estimated earnings per share growth rate of 20.9% for the current fiscal year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Another stock worth considering is Foot Locker, Inc. FL, which has a long-term earnings growth rate of 9.4% and Value Score of A. This athletic shoes and apparel retailer delivered an average positive earnings surprise of 9.7% in the trailing four quarters. The stock, which flaunts a Zacks Rank #1, has an estimated earnings per share growth rate of 10.4% for the current fiscal year.

Investors can also count on Costco Wholesale Corporation COST, which operates membership warehouses. This Zacks Rank #2 company has a long-term earnings growth rate of 8.9% and a Value Score of B. The company has delivered an average positive earnings surprise of 5.5% in the trailing four quarters. The stock has estimated earnings per share growth rate of 15.8% for the current fiscal year.

Darden Restaurants, Inc. DRI, which owns and operates full-service restaurants, is a solid bet with a Zacks Rank #2 and Value Score of B. The company with a long-term earnings growth rate of 10.3% posted an average positive earnings surprise of 3.7% in the trailing four quarters. The stock has estimated earnings per share growth rate of 20.2% for the current fiscal year.

Today's Best Stocks from Zacks

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Foot Locker, Inc. (FL) : Free Stock Analysis Report
 
Abercrombie & Fitch Company (ANF) : Free Stock Analysis Report
 
Costco Wholesale Corporation (COST) : Free Stock Analysis Report
 
Darden Restaurants, Inc. (DRI) : Free Stock Analysis Report
 
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