In this article we’ll delve into the Top 10 Retail Stocks to Buy Now. To jump straight to the best investment ideas in the space, check out the Top 5 Retail Stocks to Buy Now.
The retail landscape is in the midst of unprecedented upheaval due to the ongoing coronavirus pandemic. Supply chains have been challenged, new safety protocols have had to be implemented, and companies have frequently had to hire more staff to clean (and clean, and clean) and manage their locations, pinching their bottom lines.
With many customers turning to online shopping in droves to keep them away from their germ-carrying fellow citizens, smaller retailers with less robust e-commerce platforms (or none at all) have likewise struggled, ceding yet more ground to their larger counterparts. Not even Black Friday could compel shoppers to head out to their local retailer, as traffic was down 52% according to preliminary data compiled by Sensormatic Solutions. In its place, online Black Friday sales grew by 22%.
And online shopping isn’t going anywhere, pandemic or not. Moody’s retail analysts projected in August that changing shopping habits brought about by the pandemic will drive online sales to account for more than 25% of all retail sales within five years.
For many of the top retail stocks to buy now, overall economic activity hasn’t been nearly as bad as some investors might suspect. In fact, the majority of them have done very well during the pandemic. While customer visits are generally down, sales are nonetheless up as customers make the most of their visits and stockpile goods while they have the chance.
Many that didn’t make the list, particularly apparel retailers like The Gap Inc. (NYSE:GPS) and Macy’s, Inc. (NYSE:M), have struggled mightily however, being forced to close thousands of stores as customers increasingly buy clothes online, because who in their right mind wants to walk around a store touching and trying on clothes in the middle of a pandemic? Mall stores are also being battered during the pandemic, with Moody’s analysts predicting that as many as 20% of them will be closed within five years, which may end up being conservative.
Needless to say, the retail landscape is rapidly being reshaped, with bigger winners and bigger losers emerging daily. To sift through the good, bad, and ugly retail stocks to get straight to the best ones on the market, we turned to hedge fund ownership data, which our research has proven capable of generating market-beating returns.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. That doesn’t mean there isn’t money to be made off their consensus stock picks. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Now then, let’s check out the Top 10 Retail Stocks to Buy Now. Note that all hedge fund data is based on the exclusive group of 800+ funds tracked by Insider Monkey as part of our market-beating investment strategy.
10. Dollar Tree, Inc. (NASDAQ:DLTR)
Dollar Tree, Inc. (NASDAQ:DLTR) has had relatively strong and stable hedge fund support over the previous five years. 50 funds were long DLTR on September 30, owning $1.91 billion worth of shares. Hedge funds appear to like the stock as a recovery play in 2021, with expectations that Dollar Tree will return to sales and earnings growth.
Not all hedge funds are pleased with the discount retailer’s execution however. Upslope Capital took aim at Dollar Tree in its Q2 investor letter, criticizing management for making excuses related to its performance and lamenting that its thesis that DLTR would excel during challenging economic times was no longer assured. The fund sold out of its DLTR position during the quarter.
9. Dollar General Corp. (NYSE:DG)
Another discount retailer lands in the top 10, as Dollar General Corp. (NYSE:DG) was owned by 56 hedge funds on September 30, an 87% increase since the end of 2018. Dollar General, the largest such retailer in the U.S has excelled during the pandemic, growing sales by 24.4% year-over-year in Q2 and by 17% in Q3. Same store sales surged by 18.8% in Q2 and by 12% during the latest quarter.
Several initiatives have helped Dollar General accelerate sales and profits, including the addition of fresh produce to its inventory and a contactless pickup option through its app. In addition to the strong performance from its existing locations, which number nearly 17,000, DG plans to increase that count by more than a thousand next year.
8. Target Corporation (NYSE:TGT)
Hedge funds have showed renewed confidence in Target Corporation (NYSE:TGT) over the last three years after ownership of the stock bottomed out at just 29 funds at the end of 2017. That figure has nearly doubled since then to 57 as of the end of September.
TGT shares have had a big year, gaining 37% thanks to pandemic tailwinds for the big box retailer, which grew e-commerce sales by over 140% in Q2 and scored an impressive 4.5% same store sales bump in Q3. Hedge funds also like Target for its growing dividend, which was raised again this year for the 49th straight year, though the yield of 1.55% has dipped significantly since 2018 as the stock has surged.
7. CVS Health Corporation (NYSE:CVS)
61 hedge funds were long CVS Health Corporation (NYSE:CVS) on the September 30, ranking the pharmacy retailer as the seventh-best retail stock to buy now. Hedge funds like CVS’ diverse set of businesses, which includes its retail component, as well as health insurance operations and pharmacy benefits management.
Bill Miller’s Miller Value Partners believes that array of businesses is being undervalued by the market by as much as 50% according to the fund’s Q3 investor letter. The fund is also bullish on CVS’ HealthHubs initiative, which the company plans to roll out to 1,500 locations by the end of 2021. While the fund sold out of its long position in CVS earlier this year to invest in more promising Covid recovery plays, it does have long-term call options on CVS, believing them to offer a favorable risk/reward proposition.
6. Tiffany & Co. (NYSE:TIF)
There was a surge in hedge fund ownership of Tiffany & Co. (NYSE:TIF) in the fourth quarter of last year after the luxury retailer entered into a merger agreement with French luxury goods giant LVMH, which counts Louis Vuitton among its many renowned brands. 61 hedge funds were long TIF at the end of Q3.
That merger agreement was temporarily shelved due to pandemic headwinds but is back on again in adjusted form, with the price tag for Tiffany dipping to $131.50 per share from the original offer of $135. The deal is expected to close early next year.
The pandemic hasn’t quenched consumers’ thirst for luxury goods in the slightest, as Tiffany had a very strong third quarter. EPS grew by over 70% year-over-year, while online sales grew by 92%. The Chinese market was another bright spot, as sales in Mainland China grew by 70%.
Click to continue reading and see the Top 5 Retail Stocks to Buy Now. Disclosure: None. Top 10 Retail Stocks to Buy Now is originally published at Insider Monkey.