Last Friday, it looked as if the market was ready to roll
over, with retail and restaurants getting clobbered. But what a difference a
week makes, with equities staging their biggest weekly gains of the year, with
the likes of Home Depot (HD), Costco (COST) leading retailers out of the gutter
and Amazon (AMZN), Alphabet (GOOGL) and Apple (AAPL) rallying the tech sector.
So with many stocks pushing up to 52-week or all-time highs, where can you look
for gains going into the end of the year? I would look at 2 retail stocks that
are actually doing very well despite their recent stock performance.
Under Armour (UA)
After hitting a new all-time high of $105.89 in September the
stock has gotten hammered, falling 15% to close at $92.01 on Friday, other than
the fact that the stock is very expensive, trading at 68x FY16 earnings.
However, valuation doesn’t seem to matter with Amazon and Netflix, so why
should it matter for Under Armour, a company that actually make a lot money. On
its most recent earnings call, management said they expect to maintain its 25%
or more sales growth next year, including strong sales of its high-margin
footwear business. Most companies would kill for that kind of growth. Under
Armour’s stock sell-off was punctuated by horrible earnings from Macy’s and
Nordstrom, which sent every retailer lower. But don’t confuse poor sales at
Macy’s and Nordstrom for poor sales at Under Armour. The future of Under Armour is in its own company-operated
stores, along with its international expansion. They most recently opened
stores in Brazil and the Middle East, which helped contribute to its Q3 74%
international sales growth.
Additionally, Under Armour continues to be a big player in
the wearable fitness devices, which is expected to grow into a $6B industry
over the next year. It has 140M users in its connected fitness community.
On a technical basis, the stock reacted exactly as it was
supposed to on a sell-off, trading right around Fibonacci retracements and
putting in a bullish 5th wave down from all-time highs at $84.80,
which just so happens to be the 50% retracement from 52-week high to low. Since
bottoming out, Under Armour has rallied 8.5% in the last three days, giving you
a short-term bottom to trade against. I expect Under Armour to continue to push
back to new all-time highs and yield big gains for your portfolio.
TJX Companies (TJX)
Not all retailers are created equal. That’s why when I saw
TJX Companies trade down to $64 last a week ago, I decided to add to my
position heading into their own earnings. TJX didn’t trade lower because of
anything to do with their business, but instead got crushed because Macy’s,
Gap, and Nordstrom all reported disappointing earnings and guidance. But TJX
isn’t like any of those three retailers. This is a market where off-price
retailers still dominate and more importantly, so does home furnishings. The
latter is the biggest reason to be a buyer of TJX, as the parent company owns
and operates low-cost, home furnishing outlet, Home Goods. Those stores
accounted for 6% same-store sales growth, with net sales growing almost 13% to
$960M.
Last week, TJX beat on the both, the top and bottom lines,
posting Q3 sales of $7.8B, ahead of the estimated $7.7B. Same-store sales were
up 5%, marking the 27th straight quarter of same-store sales growth,
led by an increase in customer traffic. While inventory build up is what is
plaguing most retailers, TJX says inventories were up 6%, a number which
management is comfortable with, as it provides more flexibility to deliver
fresh merchandise to every store.
In a sign that of good things to come, TJX raised its FY16
sales guidance, where the company now expects same-store sales to rise between
4%-5%, up from 3.5%.
TJX has done everything right for a long time now and I
don’t see that abating anytime soon. They have brought in better quality
products, are catering to a market that is still going very strong, and with
its Home Goods business, puts itself in a position to take advantage of the
continuously strong housing market.
TJX rallied about 10.5% off the new 52-week low on Monday to
close at $70.15 on Friday, right at the 50% retracement. You don’t have to wait
for the stock to sell off again to get in, as I think there is still about another
15% upside to go. At the same time, TJX does pay a 1.20% dividend and continues
to add value for shareholders through buybacks.
Don’t give up on all retail. Macys hasn’t been operating
well for over a year and Nordstrom did not do a good job of managing inventory.
Cool companies like Under Armour are still a hit with consumers, and the
low-end retailers and housing market are alive and well, a sweet spot for TJX.
My current positions: Long
Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Time Warner (TWX), NXP
Semiconductors (NXPI), Darden Restaurants (DRI), Celgene (CELG), Mobileye
(MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals (URI),
Regeneron (REGN), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L
Brands (LB), Costco (COST), Amgen (AMGN), Home Depot (HD), Allergan (AGN),
FireEye (FEYE), Humana (HUM), Skyworks Solutions (SWKS), Disney (DIS), Lockheed
Martin (LMT), TJX Companies.
Jeff Lewison
