Attention Shoppers! Great Deals on Retail Stocks
As the father of three teenage girls, when I hear the word “shopping” I instinctively cringe. Imagine trying to find the right outfit with all the right accessories for a fickle teenager…. And multiply it by three!
But while the word shopping may make me nauseous, I’m apparently in the minority. This week, the Conference Board announced that US consumers are feeling more confident than at any time since 2007.
That’s a very strong reading!
As an investor, I immediately started thinking about which retail stocks should benefit from this confidence. I came up with three different categories of stocks that should do well heading into the end of the year.
Below is a quick snapshot of retail stocks that you should keep on your watch list, along with some ideas for how to play these opportunities.
Auto Manufacturers: All About the Trucks and SUVs
There are lots of reasons to like U.S. auto manufacturers.
For starters, these stocks are relatively cheap, making them attractive targets for value investors. Some investors are worried that loans offered by these manufacturers could go bad. But I believe that job growth in the US should minimize losses on these loans.
More importantly, low interest rates make it easier for confident consumers to buy new cars. And low gasoline prices are making pickup trucks and SUVs more affordable to drive. Since these vehicles carry higher profit margins, US auto companies should be able to grow earnings.
Incidentally, the Scheidt family is in the market for a new (actually just new to us) SUV. I’ll have a lot more fun shopping for this item than looking for a new dress with my daughters – haha.
Here are the two U.S. auto companies I’m watching:
General Motors (GM) – Shares of GM have been rangebound for the last several quarters, even though the company’s earnings have moved higher. GM currently pays a 4.75% dividend yield which should make the stock especially attractive in today’s low interest rate environment. In August, I wrote that GM was a good candidate for setting up a bear call spread. I still think that trade makes a lot of sense for this stock.
Ford Motor (F) – Ford’s business has not grown as quickly as General Motors. But the company is currently sitting on more than $17 billion in cash, and Ford pays a 5.01% dividend yield. With a PE near 6.5, Ford is definitely in “value territory.” Thanks to the low valuation and high dividend yield, I think it makes sense to own shares of this stock outright.
Home Furnishings: Riding the Housing Trend
It’s been a great environment for home builders. After the financial crisis, builders scaled back on new residential building and the ultimate result is a current shortage in residential units.
This lack of supply has helped to drive prices for homes and for rentals higher. At the same time, low interest rates have made it easier for individuals to get financing for new homes.
Add it all up, and you’ve got a strong current market for home building, and statistics for new household formations have been strong. That’s great news for retail companies who sell home furnishings. Here are two particular home furnishing stocks I’ve been following:
Restoration Hardware (RH) – This home furnishings company caters to affluent homeowners and renters. Shares have pulled back following a few quarters of disappointing profit margins. But management appears to be turning the company around and profits at RH are expected to grow for the next two year. I have generated instant income in my personal account by selling put contracts on RH.
Williams Sonoma (WSM) – In a retail world dominated by Amazon, WSM has been hard at work building out it’s e-commerce platform. With a larger percentage of sales coming from online customers, WSM is making the transition well. Similar to RH, I believe Williams Sonoma is a great candidate for selling puts. This way, you can generate instant income, while potentially buying shares at a discount.
Holiday Retail Stocks: It’s Going to Be a Great Christmas
The strong consumer confidence reading is especially encouraging as we approach the holiday spending season.
With more Americans employed, it looks like this will be a great holiday season for retailers. Paying attention to which retailers are likely to see a sales spike this fall could help investors earn their own holiday spending money.
Historically speaking, the months leading up to Christmas are typically strong for retail stocks. So you’ll probably want to take advantage of these opportunities sooner rather than later.
Here are two specific companies I expect to profit from holiday spending this year:
Mattel Inc. (MAT) – The parent company of Barbie, Fisher Price, and American Girl dolls has been on my radar for some time. (And not just because I’m a father of seven.) Mattel has been turning its company around after some major missteps in 2014 and 2015. This holiday season should give MAT an opportunity to showcase it’s new creative line of toys. The stock has a 4.8% dividend yield, making it very attractive to income investors.
Macy’s Inc. (M) – This iconic retailer has been challenged by lower foot traffic to U.S. malls. But these challenges have a silver lining. Shares of Macy’s now trade at a discount, while the company has been actively closing down stores with poor performance. The end result should be a more stable retail powerhouse that once again generates reliable returns. Macy’s has also been active in buying back shares at discount prices and paying shareholders through its 4% dividend yield.
While there are still plenty of questions surrounding the global economy, zero percent interest rates, slowing emerging markets and low oil prices; retail spending in the U.S. should continue to be a bright spot, offering investors some great opportunities to generate profits from retail stocks.