U.S. Markets open in 6 hrs 2 mins

5 Great Retail Stocks to Buy Ahead of Q4 Earnings

Swarup Gupta

For most U.S. retailers, 2018 was an extremely good year. On the one hand, traditional retailers found the balance between and offline and online presence, extending their life span in the process. On the other hand, digital marketers continued to challenge the status quo with innovations.

It was a different story for the sector’s stocks of course, with the sector ending the year in the red. However, a nascent recovery has been witnessed in the last one month, with the stocks gaining from a late Santa Claus Rally.

With the economy remaining strong and the job market continuing to be bullish, retail remains a good investment option. This is why it is a good idea to pick up select stocks from the sector that are likely to outperform their earnings estimates.

Retailers Enjoyed Strong 2018

A strong economy and a robust labor market propelled retail higher in 2018. According to Matthew Shay, president and CEO of the National Retail Federation, 2018 was “one of the best years for the retail industry in a decade.”

Shay added that forecasts of a “retail apocalypse” have all but disappeared. However, he agreed that there are factors which “are out of our control.” At the same time, if the sector manages to “avoid self-inflicted wounds,” a successful 2019 is within sight.

Further, retailers enjoyed a great holiday season with sales hitting a six-year high. Excluding automobiles, holiday retail sales grew 5.1% between Nov 1 and Dec 24 compared with the year-ago period, per MastercardSpendingPulse, which tracks both online and in-store spending with all forms of payment.

Per the report, shoppers spent more than $850 billion this holiday season. Given that Christmas Eve fell on Monday, retailers benefited from the last-minute push from shoppers, who were counting on the final weekend to complete their gift-buying. (Read: Holiday Retail Sales Hit Six-Year High: 5 Stocks to Buy)

Q4 Earnings Prospects Healthy

Earnings and revenue growth for sectors across the board are expected to decelerate appreciably in the fourth quarter. For retail stocks, total Q3 earnings were up 26.1% on 6.4% higher revenues.

But total Q4 earnings for the sector are expected to be up 18.7% on 4.7% higher revenues. This represents a considerable decline in pace, but is still better than autos, conglomerates and utilities. Earnings growth for these sectors is set to decline 15.4%, 13.1% and 6.3%, respectively.

Overall, retail stocks had a torrid 2018. The SPDR S&P Retail ETF (XRT) is down 8.3% over the past year and 4% over the past three months. However, a late Santa Claus rally has boosted the sector and it is up 16.7% over the past one month and 9.4% year to date.

For the S&P 500 index as a whole, total Q4 earnings are expected to be up 10.7% from the same period last year on 5.3% higher revenues. (Read: Key Takeaways from Q4 Earnings Results Thus Far)

Our Choices

It now seems that retailers have emerged from 2018 relatively unscathed. While the sector still faces a number of challenges, a strong economy and robust labor market remain its main driving forces. A robust holiday sales season indicates that the sector may have sufficient momentum left after all.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Tractor Supply Company TSCO is the largest retail farm and ranch store chain in the United States.

Tractor Supply beat the Zacks Consensus Estimate for earnings in three of the last four consecutive quarters, with an average positive earnings surprise of 4.6%.

Powered with the right combination of the two key ingredients — an Earnings ESP of +0.76% and a Zacks Rank of 2 — Tractor Supply is poised for a likely earnings beat in the to-be-reported quarter as well.

The company is expected to report fourth-quarter 2018 results on Jan 31.

Group 1 Automotive, Inc. GPI is one of the leading automotive retailers in the world.

Group 1 Automotive surpassed the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 9.4%.

Our proven model shows that an earnings beat is expected for Group 1 Automotive in the to-be-reported quarter as well as it has an Earnings ESP of +1.32% and a Zacks Rank of 2.

The company is expected to report fourth-quarter 2018 results on Feb 14.

Penske Automotive Group, Inc. PAG engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe.

Penske Automotive Group beat the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 6.3%.

The company is powered with the right combination of the two key ingredients for an earnings beat prediction — Earnings ESP of +3.15% and a Zacks Rank of 2.

The company is expected to report fourth-quarter 2018 results on Feb 14.

Dillard's Inc. DDS is a large departmental store chain featuring fashion apparel and home furnishings.

Dillard's beat the Zacks Consensus Estimate for earnings in three of the last four consecutive quarters, with an average positive earnings surprise of 21.2%.

Dillard's has an earnings beat in the cards this time too as it has an Earnings ESP of +2.56% and a Zacks Rank of 2.

The company is expected to report fourth-quarter 2018 results on Feb 26.

Office Depot, Inc. ODP is a supplier of a range of office products and services.

Office Depot topped the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 11.9%.

Powered with the right combination of the two key ingredients — an Earnings ESP of +4.35% and a Zacks Rank of 1 — our proven model shows that an earnings beat is expected for Office Depot in the to-be-reported quarter as well.

The company is expected to report fourth-quarter 2018 results on Feb 27.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.     

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.  

See the pot trades we're targeting>>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Penske Automotive Group, Inc. (PAG) : Free Stock Analysis Report
 
Group 1 Automotive, Inc. (GPI) : Free Stock Analysis Report
 
Tractor Supply Company (TSCO) : Free Stock Analysis Report
 
Office Depot, Inc. (ODP) : Free Stock Analysis Report
 
Dillard's, Inc. (DDS) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research