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Few sectors have been battered like retail.
A trifecta of bearish pressure, including the explosive growth of online shopping, consumer burnout, and with a failure to change with the times, combined to knock the sector lower.
Retail stocks are lower by around 30% on average in the last three years. Some have plunged much more, and others have closed their doors permanently. Toys “R” Us is the latest casualty of the retail apocalypse.
Over 6,700 retail locations closed their doors in 2017 — a staggering figure no matter how you look at it.
Opportunity lays in adversity, and nowhere is this more evident than the stock market.
Buying when there is blood in the street is a time-proven way of earning outsized returns. However, the question has always been when and what to buy. To be sure, some retailers will not survive the current rout. Others will grow stronger and thrive in the face of the meltdown.
This is where technical analysis makes sense. While far from 100% accurate, technical price charts can key you in to when trend changes may occur.
Things appear to be slowly improving, with the S&P 500 Retail ETF (XRT) just slightly lower in 2018 and higher by just over 5% in last 52 weeks.
What first attracted me to the diminished sector is the fact that price remains above the critical support at the 200-day simple moving average (SMA) and is building a base in the $44.00 per share zone. The base building above the 200-day SMA creates a compelling technically bullish picture right now.
When the technical factors are combined with the fundamental macro factors of growing employment, tax reform, and more money in consumer pockets, it spells opportunity.
I have identified the three retail stocks I expect to thrive in 2018 and beyond.
1. Kohl’s (NYSE: KSS)
This $10 billion-plus market cap department store chain’s stock is higher by over 17% in 2018. The company operates over 1100 department stores, an online commerce platform, 12 Fila Outlets, and three “Off/Aisle” clearance stores.
Focused on moderately priced items, Kohl’s fills a niche not met by the high-end department stores. Several bullish happenings have me very excited about this firm’s future.
First, the company recently announced that it is adding discount grocer Aldi to its stores. The department store chain plans on filling its space with the Aldi discount groceries. An incredible move!
Aldi specializes in deeply discounted, private-brand groceries with prices up to 50% lower than competitors. The addition of Aldi to up to 300 Kohl stores will bring an entirely new customer base through the doors to experience Kohl’s products.
Secondly, analysts at Barclays have postulated that another partnership with Whole Foods is a possibility. Kohl’s currently partners with Amazon, acting as a return center and selling some of Amazon’s products. Amazon-owned Whole Foods has a discount operation called 365 — an ideal fit for the Kohl’s demographic. While only speculative, the relationship could be a huge win-win for both brands.
The combination of the Aldi partnership and the speculative Whole Foods partnership is incredibly enticing! Add the fact that the company just posted its best same-store sales growth since 2010 and the worst looks over.
Technically, shares have hit resistance in the $67.50 per share zone and have slipped back to support at the 50-day SMA. Buying now in the $64.00 area makes sense with a target price of $85.00 per share.
2. Macy’s (NYSE: M)
This iconic American department store chain has fallen on a hard times. Once a leading name in retail, Macy’s has been reduced to a has-been in the competitive arena.
It looks like the worst is over for Macy’s, but it’s a great time to get long. Here’s why.
Yielding over 5%, the company boasts a market cap of nearly $9 billion and owns a massive real estate empire. In fact, Macy’s real estate holdings are worth more that its entire market cap at approximately $14 billion. Macy’s is tapping this incredible cash source raising over $1 billion over the last two years. Fortunately, the company has a strategic plan to redevelop several floors in their flagship locations. This keeps the iconic stores operating and brings in new revenue.
Other bullish initiatives include pop stores inside existing Macy’s to create consumer excitement and a substantial online presence. I was shocked to learn that Macy’s is the 6th largest online retailer in the United States with over $5 billion in sales!
My play on Macy’s is as a breakout stock. Get long on an upside tear of $30.00 per share with a $42.00 target price.
3. JC Penney (NYSE: JCP)
Trading at just $3.00 per share, JC Penney is the riskiest stock of the group. However, with the risk comes potential high reward.
The company saw modest improvement in the 2017 holiday season and has grown its e-commerce initiative by double figures.
Adding appliances to take up the slack from a near-dead Sears and offering home services have worked to improve the bottom line.
With the stock down by nearly 50% in the last 52 weeks, bottom fishers rejoice. A small base has formed at $3.00 per share and buying now makes sense with a target price of $6.00 per share.
Risks To Consider: Make no mistake: All the aforementioned stocks are highly speculative. Always use stops and position size properly when investing.
Action To Take: The above retailers are for your long-term portfolio. My time horizon is 3-5 years. These are not get-rich-quick names. They are listed in the order of my favorite to least favorite. Consider investing in one or more!