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A Record-Breaking Holiday Season Will Drive Shares of a Few Companies Higher

Stock prices are affected by various macro-economic developments and paying close attention to market-moving trends could help investors generate alpha returns. Between Thanksgiving Day and the dawn of the New Year, shoppers in the U.S. and around the globe hunt for bargains, creating a massive opportunity for retailers and e-commerce platforms to boost their sales. Investing early in companies that are expected to report stellar earnings during the holiday season would lead to gains by the time fourth quarter 2019 financial reports are released.


Historical data provides a reason to believe that equity markets will perform positively in the remainder of this year. However, from a sales perspective, it's important to keep in mind that there are 6 fewer days in this season than what it was in 2018. This could have an impact on the overall revenue of retailers as well.

Source: Kensho

E-marketer expects total U.S. holiday season sales to hit $1 trillion in 2019, which would require a growth of 3.8% over 2018 sales.

Source: E-marketer

Cyber Monday is once again expected to be the biggest online shopping day in the U.S., and both Black Friday and Black Tuesday will follow closely.

In the first part of this article, the key themes of the 2019 season would be analyzed. The second half of this analysis is dedicated to discussing potential winners from these trends and companies that are better left alone.

E-commerce sales will outpace retail growth

Retail giants including Macy's, Kohl's, and Home Depot dominated sales during the holiday season for many consecutive years, but the pendulum has swung, and dramatic changes have taken place.

Deloitte projects in-store sales to improve between 4-5% in this season, in comparison to the last year. E-commerce sales, on the other hand, are projected to grow between 14-18%, indicating the strong traffic flowing into platforms like Amazon. The market research firm, E-marketer, confirms this and believes that little would change in 2019 from the last 6 years.

Source: E-marketer

Deloitte further believes that a record number of shoppers are likely to use their smartphones to hunt for bargains, providing an edge to online shopping giants who offer a seamless experience to consumers. While it doesn't come as a surprise that the quality of the product and the price are top priorities of shoppers, 4,140 participants surveyed by Deloitte confirmed that convenience is also among the most important considerations in this shopping season.

Source: Deloitte

Under these prevailing circumstances, it would not come as a surprise if brick and motor store-oriented retail companies report disappointing results in the fourth quarter of 2019. However, in-store sales accounted for 86% of the total sales in 2018, and according to Reuters, will remain the dominant player in 2019 as well. However, the market share of these stores is rapidly declining.

The rise of "experience" spending

There's a new trend in the making that is endorsed by many American consumers; spending on experiences. Traveling, dining out, and socializing are among some of the key objectives during this season. In fact, Deloitte reports that two-thirds of holiday shoppers plan on socializing away from home, spending an average of $391. Spending on experiences is expected to reach 40% of the total expenditure in 2019.

Source: Deloitte

Companies that cater to this demand from consumers are likely to report stellar earnings in the fourth quarter.

Macro-economic indicators paint a positive picture

Economic and political uncertainty created panic among shoppers during the holiday season of 2018. The government shutdown was one of such events that led shoppers to cut back on spending and save for rainy days in the future. In addition to this, major stock indexes in the U.S. continued to shed their gains from the latter part of the third quarter until the end of the fourth quarter of 2018, giving rise to recession fears among investors.

Source: YCharts

The escalating trade war between the U.S. and China also contributed to the pessimistic sentiment of investors and consumers in 2018. However, as we head to the holiday season of 2019, macro-level indicators are supportive of higher spending. For instance, equity markets are near record highs and many Wall Street analysts believe that a continued rise in stock prices is likely, given that corporates are reporting strong earnings that beat consensus estimates. On the other hand, there is no fear of a government shutdown and both the World Bank and the International Monetary Fund project the U.S. economy to grow at low-single-digit rates in the next couple of years.

To make things even better, Chinese officials confirmed last week that a trade deal is imminent, and both the parties are committed toward the success of negotiations to ensure the continued growth of the global economy.

The unemployment rate in the U.S. is at a 30-year low and wage levels are rising. These are also indications of a healthy shopping season in 2019.

Source: GuruFocus

Consumers are moving onto the shopping season on a positive note this year, and the macro-economic indicators are supportive of spending.

Winners and losers

There is no doubt that this holiday season will give rise to winners as well as losers. The dynamics are changing, so are the consumer purchasing habits. Therefore, going by historical data and investing in retail giants could end up providing disappointing performance to investors. On the contrary, betting on e-commerce platforms and traditional retail companies with a strong online presence would likely deliver alpha returns within the next 3 months when companies report fourth-quarter financial results.

Amazon.com, Inc. (NASDAQ:AMZN) is one of the top picks for investors and is a holding of the legendary investor, Warren Buffett (Trades, Portfolio), as well. The company is one of the leading e-commerce platforms in the world and offers free next day shipping on most items to its Prime Members. As highlighted earlier, convenience would be one of the top priorities of consumers in this shopping season, and Amazon has a history of addressing this concern. The skilled staff who are experienced in handling mass orders during events like Black Friday and Cyber Monday will provide the edge for the company to stand out from the rest and meet customer expectations. So far this year, Amazon shares have trailed behind the S&P 500 Index.

Source: YCharts

If Amazon reports stellar sales numbers for the fourth quarter, which it most likely would, shares will get a boost and could trump the performance of the Index.

Best Buy Co, Inc. (NYSE:BBY) is another company to look out for in this season. The electronics retailer increased its earnings guidance for the full year in its third-quarter earnings conference call, based on the expected revenue growth in this season. According to online market research data from SEMRush, Best Buy is the most-searched-for company for Black Friday deals, which indicates the company's successful online advertising campaigns.

In addition to these two companies that look prime to benefit in this holiday season, Target, Hasbro, Boot Barn, and Booking Holdings could also beat analyst estimates and report an earnings surprise.

Some companies that have historically been successful during holiday seasons have already cut their earnings guidance for the full year, indicating the increasing competition from online retail giants. The below table provides a list of noteworthy companies that guided for lower earnings.

Company

Guidance change

Home Depot

Maintained expectation of earnings per share of $10.03 but trimmed full-year comparable sales to 3.5% from 4% and revenue growth to 1.8% from 2.3%

Kohl's

Full-year earnings per share guidance of $4.75 to $4.95, versus prior guidance of $5.15 to $5.45

Macy's

Full-year earnings per share guidance of $2.57 to $2.77, versus prior guidance of $2.85 to $3.05



Source: Company filings

Avoiding these companies at this time seems to be the best option, especially if the objective is to benefit from the expected sales growth over the next month.

Conclusion

The best performing Dow Jones constituents from Thanksgiving to Christmas Eve from 1990 to 2017 might find it difficult to hold on to their positions this year with e-commerce leaders looking ready for a rally.

Source: Kensho

The best option for investors is to stay with companies that have a strong online presence and search for companies that address the changing purchasing habits of consumers. The holiday season, for sure, will provide great investment opportunities. Investors should carefully evaluate these and select the ones that fit best with their investment objectives and time horizon.

Disclosure: I do not own any stocks mentioned in this article.

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This article first appeared on GuruFocus.