An underrated opportunity: what is a retail stock?
Businesses engaged in the retail industry sell goods, mainly through stores or online portals, to the end consumer for personal use. They typically offer a broad range of products, including groceries, home goods, appliances, sporting goods, apparel, auto parts, electronics and more.
Once-popular retail stocks have gotten short changed by investors in recent years, as the conventional wisdom about the upcoming "retail apocalypse" has taken over – causing many investors to flock to faster-growing industries like the tech industry.
Pressure from e-commerce giants, Amazon-alike, have forced major changes in the way retailers do business. With customer traffic falling in traditional strongholds like shopping centres and malls, uprising online chains have adapted by building their own digital marketspaces and finding new ways to attract more clients into virtual stores.
Though some traditional retailers may be in the midst of an "apocalypse," others are thriving. For example, well-established companies like Target or TJX Companies remain substantially successful and are continuously growing both comparable sales and profits.
Some people may say there is nothing for investors in the retail sector today. However, they said the same thing about energy and mining companies two years ago, about banks seven years ago and about tobacco ten years ago. In each instance, value investors argued there was money to be made in those sectors and went on to prove it.
Moreover, given that environment, it's not surprising that much of the industry is being significantly undervalued according to traditional metrics like the price-to-earnings ratio. That led to a number of retail stocks to trade at bargain prices, with plenty of them paying juicy dividend yields. So, savvy investors can benefit from scepticism, low valuations and the overlooked opportunity in the retail industry.
Dig beneath the bad news: why invest in retail?
Frankly, retail stocks are not the ones that look the most appealing today. While the world-renowned S&P 500 has gained an overwhelming 18% on a year-to-date basis, the SPDR S&P Retail ETF increased a meagre 3%, which is not surprising in light of the trade war saga between the US and China.
But now, the trade war between the world’s most powerful economies have been put on hold, and a truce seems imminent. This development is expected to reinvigorate global consumers, which, in turn, should bode well for retailers during the second half of 2019.
While global political and economic instability does affect discretionary spending and consumer sentiment, investors should keep in mind that interest rates and unemployment remain at record lows, and the economy continues to expand despite some concerns about a recession. These are the reasons to believe that retail stocks might see a turnaround and climb even higher as they benefit from increasing consumer spending and rivals retrenching and closing down stores.
Additionally, the back-to-school shopping season is just around the corner, with Amazon Prime Day expected to kick off the event. Besides, data from MiQ, a marketing intelligence company, showed that shoppers will visit stores on average 16 times to buy back-to-school items between July and September. Thus, it might be just the right time to invest in retail stocks that can make the most of the big upside potential over the upcoming months.
While the industry suffers from excessive noise, it only means investors can benefit from selecting the best retailers that can withstand and excel in today’s environment.
Are there any risks involved in retail stock investments?
Undoubtedly, there are. Just like any other industry, investing in retail stocks can give no guarantee of financial success.
The changes in the retail industry that we've evidenced with the rise of e-commerce aren't over. Online retail continues to take share from traditional stores.
The growth of e-commerce has made stores less relevant for customers, causing some chains to close stores or repurpose their space by focusing on customer service, experiences and products that aren't easily sold online. The rise of e-commerce has accompanied a decline in shopping centres traffic, which has negatively affected mall-based chains in particular, such as Gap and Victoria's Secret parent L Brands.
Surely, “offline” shops aren't going to completely disappear, but the retail experience will have to change to keep up with innovations. In order to thrive in the future and win back customers, traditional retailers will have to either reinvent the store experience, build out a successful online presence, or combine elements of both online and offline experience to find new ways to add value.
We recommend to always arm yourself with as much knowledge as possible before throwing your hard-earned cash in any investment. Do your research and take your time studying the retail stock performance of your choice.
To make it a bit easier for you, we’ve come up with a list of best performing retail stocks of the year.
What are the best retail stocks to buy in the second half of 2019?
When looking for retail stocks to invest in, you need to look for some of the following factors: stable gross margins, positive comparable sales and competitive advantages against other retailers, online or offline.
So, which publicly traded retailers should you consider? First and foremost, Amazon (AMZN). It has been confidently taking market share from traditional retail, and its sales are could be set to rise further.
But it’s not just e-commerce that should have your attention. Other retailers with specific niches, or that have shown a history of innovation, are also expected to do well. The innovation-driven companies, whose price charts look rather promising, include Adidas (ADS), Lululemon (LULU) and Nike (NKE).
According to the retail stock analysis, discounters have also shown some hope based on the latest earnings at Dollar General (DG) and Dollar Tree (DLTR), both of which rose sharply in May.
Well like these two, there are other prominent retailers that are riding on the wave of favourable consumer environment and strategic endeavours. TJX (TJX), owner of TJ Maxx stores, has thrived too. So did the big box stores with a value proposition like Wal-Mart (WMT) and Target (TGT). Moreover, Goldman Sachs has named Target its top pick in the big box group due to the business' potential for sustained same-store sales growth and opportunity to benefit from competitor store closures and bankruptcies. Costco (COST), which has already gained 18% this year, is still sitting firmly in the winning column.
The majority of these retailers are making prudent investments, enhancing omnichannel capacities, refurbishing stores, introducing new brands, expanding same-day delivery options and focusing on cost savings.
How to trade retail stocks CFDs
One of the easiest ways of trading retail shares in 2019 is a contract for difference, or CFD. When using CFDs, you don’t actually buy the underlying asset itself, but instead, simply speculate on its price direction. It allows you to go short or long on the chosen stock, providing easier execution and greater liquidity. However, since CFDs are a leveraged derivative, both winnings and losses are magnified.
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