Even after the solid rally seen in the post-election period, we believe there is more to come. Santa might be bringing some “gifts” to the stock market, so you might say that we’re on the cusp of the Santa rally.
Since 1957, the second-best month of the year for stocks has been December: the month ended with a positive return nearly three-quarters of the time in that period But just buying up any stock won’t work. Rather, it’s time to focus on the beaten-down retail space, which might be a great place to find some overlooked opportunities.
The millennial generation is one key to the retail landscape. The rate of employment (not unemployment) for those 25 to 34 years old is at its highest level since the early 1980s. The workplace is getting flooded with millennials.
Thus, I’m looking for those overlooked retail stocks that will play catch-up this holiday season, and that are tapping into demand by the millennial consumers. Here are the three best retail stocks for that Santa rally:
Santa Rally Stocks, No. 1: TJX Cos. (NYSE: TJX)
TJX’s key brands include TJ Maxx, Marshalls and HomeGoods. For years, and especially throughout the financial crisis, TJX has been a retail powerhouse. Known for its “treasure hunt” bargain-shopping experience, each store carries different inventory. It keeps new merchandise in its stores but limits the inventory in each store to keep customers coming back for new finds.
TJX beat expectations in its recent quarter and generated a strong 5% increase in same-store sales (stores open for at least a year) from the same quarter a year earlier. More impressively, TJX continues to expand its margins, which has helped it make headway amidst the rise of online shopping.
TJX is a cash-flow-generating machine and is starting to reward shareholders nicely. The company has doubled its dividend since 2012 and now pays a 1.4% dividend yield.
Santa Rally Stocks, No. 2: Kohl’s (NYSE: KSS)
Kohl’s’s is also a retailer offering a treasure-hunt-type shopping experience in clothing and home goods that have appeal for millennials. Kohl’s stock has outperformed that of TJX, but Kohl’s is still one of the cheapest stocks in the department-store space, trading at 13 times next year’s earnings estimates.
Kohl’s been on an inventory reduction mission to better control costs. It is shifting to a localization strategy that allows it to tailor each store’s merchandise to its local market. It’s also rolling out new products, like Under Armour (NYSE: UA) and the Apple (NASDAQ: AAPL) Watch.
Santa Rally Stocks, No. 3: Under Armour (NYSE: UA)
Under Armour isn’t part of the conventional retail fold, although it does operate several hundred outlet and branded stores. But you’ll also find Under Armour goods in various retailers like Dick’s Sporting Goods (NYSE: DKS). It has strong appeal for the millennial market.
Under Armour recently became the second-largest sportswear brand in the U.S. by sales. While many retailers are shrinking its presence, Under Armour is doing just the opposite, opening stores throughout the year. But after a dismal earnings report, Under Armour shares are down 34% in 2016.
Shares now trade at a hefty discount to top competitor Nike (NYSE: NKE). Under Armour trades right at one times sales, while Nike is north of 2.5 times. Under Armour is still in a growth phase; it is opening stores in China and spending more than Nike on marketing. Yet its gross margins are very comparable to Nike’s. Under Armour still has plenty of room to grow, as it has a $5 billion market cap vs. Nike’s $85 billion market cap.
In the end, retail is beaten down but not dead. Consumers still shop at malls and are still spending. However, not all retail is created equal. The best plays for the Santa rally are those retailers with a strategy that still attracts consumer spending.