Since the economy hit its low point in the Spring of this year, there’s been a consistent trend of improving economic data and the markets have done better than expected. However, many investors and analysts have retained a bearish stance. This dynamic is evident from multiple angles.
So far this earnings season, earnings for S&P 500 components are down about 6% from 2019, however, analysts were expecting a drop between 20% and 25%. In terms of economic data, this is clear with the Citigroup Surprise Index which measures how the data is doing relative to expectations.
But, now we seem to be entering a more mature phase of this rally when expectations have increased. This is evident with the Surprise Index returning to more normal levels. Another indication was the recent retail sales report which came in at a 0.3% month-over-month gain which fell short of expectations of 0.5%.
Consumer spending has remained quite resilient during the coronavirus, although its composition has changed. In part, it’s due to the fiscal stimulus and another contributor has been that household balance sheets were in good shape going into the crisis. Remarkably, retail sales are higher on a year-over-year basis. And, this is helping boost the SPDR S&P Retail ETF (XRT) to all-time highs.
In terms of the retail sector, companies with e-commerce operations were able to grow and thrive during the crisis. Given that coronavirus infections are continuing to rise in most parts of the country, online spending will likely continue to take a large share of overall retail spending during this holiday season.
However, in recent weeks, positive newsflow about a vaccine arriving and being distributed in the next few months has led to gains for all sorts of retail stocks. It is hoped that the world will return to normal by the middle of 2021. This is a blessing for retailers reliant on physical traffic.
Given this situation, investors should look at retailers with a physical and online presence like Target (TGT), Walmart (WMT), and Ulta (ULTA). They will benefit from the short-term increase in e-commerce sales, as well as the longer-term story of foot traffic at retail stores returning to previous levels. Many of these retailers are also finding that investment in digital channels is leading to more transactions and increased transaction size with customers.
During the shutdown, the best-performers were e-commerce stocks like Amazon (AMZN), while the worst were stores that were mainly reliant on in-store sales, like Macy’s (M). As the world reopens, investors should expect this relationship to invert, thus they might want to avoid pure-play e-commerce stocks.
Another reason to be skeptical of AMZN in the near-term is the rotation from growth-to-value. As economic growth picks up and long-term rates inch higher, money will move from overvalued sectors to undervalued sectors. This relationship reached extreme levels in the last few months and a reversion to the mean could lead to sustained losses for high-multiple, growth stocks like AMZN.
Another looming threat for AMZN is the possibility of increased regulation and antitrust action. Democrats are wary of AMZN due to its market power, labor practices, and monopolistic practices, while Republicans are unfriendly to CEO Jeff Bezos due to his ownership of the Washington Post.
WMT posted very strong earnings this quarter that topped expectations by every measure. There was some concern going into earnings based on WMT’s previous quarter which noted some softness as stimulus expired.
However, WMT ended up beating on EPS, revenue, and same-store sales. Most constructive is that WMT noted that digital sales increased by 79%. Additionally, the transaction size was increasing as well.
The company’s future looks bright with its e-commerce marketplace expected to continue growing with Walmart+. It’s also adding more higher-margin items like pet care, insurance, and medical services. Following its Q3 results, WMT’s stock broke out to new highs. And, it’s one of the few stocks that seems poised to outperform regardless of the coronavirus situation.
WMT’s POWR Ratings are very strong with a Strong Buy rating. It has an “A” in all categories including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Among Grocery/Big Box Retailers, it’s ranked #1 out of 18.
TGT also beat earnings by a healthy amount with the stock making new, all-time highs. Although TGT is much smaller than WMT, it’s e-commerce operation is more impressive by some measures. Home deliveries increased by 280%, and curbside deliveries increased by 500%.
TGT is pursuing a different e-commerce strategy than Walmart by keeping its online marketplace much smaller and placing tighter criteria on who can sell on its platform. This is appealing to customers as Target does the work of curation.
Like WMT, TGT will do well during the coronavirus era due to its e-commerce segment, but it should also continue to grow when the COVID-19 vaccine rolls out, as physical store sales will compensate. In Q3, Target’s online sales increased by 155%, while its same-store sales increased by 9%. Ultimately, the pandemic was an opportunity for TGT to gain significant market share and beef up its digital sales channel.
The POWR Ratings are also bullish on the stock as it has a Strong Buy rating with an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank and a “B” for Peer Grade. Among Grocery/Big Box Retailers, it’s ranked #3 out of 18.
Ulta Beauty (ULTA)
Since its March low, Ulta Beauty is up by nearly 120%. At first glance, its strength is confounding as it primarily sells makeup, beauty products, and salon services.
However, the company’s earnings and revenue have been quite resilient. ULTA’s curbside pickup and buy online pick up in store programs boosted their e-commerce sales, recording 200% growth for the fiscal second quarter that ended on August 1, 2020.
Further, the stock is poised to outperform especially if a vaccine becomes available and distributed sometime in the middle of 2021. There will be massive, pent-up demand for people to go out and return to offices which should benefit ULTA.
Additionally, the company is in a better position to survive the downturn than its competitors given its size and strong balance sheet. This means that its market share will likely grow when things return to normal. Further, it struck a deal with Target to open 100 mini-stores inside Target stores and also sell through Target.com which should lead to another uptick in earnings and sales.
The POWR Ratings are also constructive on Ulta as it has a Buy rating. It has an “A” for Trade Grade and a “B” for Buy & Hold Grade and Peer Grade. Among Specialty Retailers, it’s ranked #14 out of 36.
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AMZN shares rose $1.04 (+0.03%) in after-hours trading Wednesday. Year-to-date, AMZN has gained 68.06%, versus a 12.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.3 Online Retail Stocks Not Named Amazon to Buy Before Black Friday appeared first on StockNews.com