Five Back-to-School Stocks to Buy Amid Current Shopping Patterns

Paul Dykewicz

Five back-to-school stocks to buy amid current shopping patterns include a consumer electronics retailer, a chain of fabric and crafts stores, a pet supplies company and two large retailers that sell virtually everything consumers may want to buy for students.

The five back-to-school stocks to buy include four recommended by BoA Global Research, which conducted a survey of shoppers to assess the latest buying trends before companies release their corresponding quarterly financial results. Key findings from the survey are that consumer electronics sales continue to be strong even though many students have returned to the classroom after taking classes remotely, while people continue to buy pets as their interaction with other humans have been limited by stay-at-home orders and social distancing.

“This should be a good back-to-school season for retailers,” said Bob Carlson, chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets. “Households had a high savings rate over the last year, making money available to spend this year. With the return of in-person learning, many families will buy things they didn’t have to buy last year.”

Pension fund and Retirement Watch chief Bob Carlson answers questions from columnist Paul Dykewicz.

Best Buy Ranks as One of the Five Back-to-School Stocks to Buy

Minneapolis, Minnesota-based retailer Best Buy Co., Inc. (NYSE:BBY), operates 1,000 stores with roughly 100,000 employees in the United States and Canada. The company has a specialty in consumer electronics and features its Geek Squad of technically savvy troubleshooters who can help people use the latest laptops, web cameras and smartphones.

While the shift to in-person learning may indicate that sales of certain home-learning consumer electronics, such as laptops, tablets and webcams, might not be as robust this back-to-school season as last year, a significantly higher percentage of respondents stated that they have spent more on electronics in 2021 than last year, according to BoA. Specifically, 39% of respondents indicated that they directed more money at such consumer electronics products this year, compared with 10% who stated that they have spent less on the category than last year, BoA added.

“This indicates that back-to-school season for consumer electronics retailers like Best Buy may not be as severely pressured as we would have expected,” BoA wrote in a recent research note. 

Best Buy’s 12-month price objective, assigned by BoA, is $157, based on 17x the investment firm’s 2022 earnings per share (EPS) estimate, which is above the stock’s historical five-year average of 12x. BoA noted that a premium valuation is deserved due to Best Buy’s “very strong execution,” continued market share gains and growing demand for consumer electronics as people stay, work and learn more at home.

Potential risks for Best Buy to achieve its price objective include slower-than-expected industry headwinds, greater-than-expected cost inflation and a slowdown in macro and consumer trends. Possible tailwinds for Best Buy are better-than-expected margin improvements, a pickup in product cycles and continued market share gains, according to BoA.

Chart courtesy of www.StockCharts.com

JOANN Gains Spot Among Five Back-to-School Stocks to Buy

“Spending on school supplies and craft materials also appears to be up year over year (YoY), with 31% of respondents stating that they have spent more than last year for back-to-school, compared to 19% indicating in the BoA survey that they have spent less this year. This result could have “favorable implications” for arts and crafts retailers such as JOANN (JOAN), the investment firm wrote.

BoA’s 12-month price objective is $24 for JOANN, based on an enterprise value / earnings before interest, taxes, depreciation and amortization (EBITDA) multiple of the investment firm’s 6x its fiscal year 2023 estimate ending January 2023. That valuation is in line with the estimated take-out multiple of JOAN’s closest comparable company, Michaels, BoA noted.

On April 15, Magic MergeCo, Inc., an entity controlled by the Apollo Funds and managed by affiliates of Apollo Global Management, Inc. (NYSE: APO), announced the successful completion of a previously commenced cash tender to purchase all the outstanding shares of common stock of The Michaels Companies, Inc. (NASDAQ: MIK). At the expiration of the tender offer, 122,994,416 shares of common stock of Michaels, roughly 85.92% of its outstanding shares, accepted the offer.

JOANN shares dropped sharply on Sept. 2 when it reported net sales that fell 29.8% year-over-year during the fiscal second quarter ended July 31, compared to the same period a year ago. It could be a buying opportunity for investors who like the stock but hoped to acquire shares at a reduced price from its $16.66 peak in June.  

This multiple still represents a discount to the hardline retail average of approximately 12x and is at the low end of a narrower comparable set of value retail stocks, BoA reported. Risks to JOANN achieving the BoA price objective include a more significant slowdown in crafting activity as U.S. markets reopen, along with competition mounting from discount stores, online retailers and brick-and-mortar peers. Those competitive threats could require JOAN to compete more aggressively on pricing or online investment, incur margin risk from a faster shift into the online channel and require store transformation initiatives.

BoA gave JOANN a price objective of $24, offering a potential upside of 132.33%, if the target is attained.

Chart courtesy of www.StockCharts.com

Petco Placed on List of Five Back-to-School Stocks to Buy

Every six months since September 2020, BoA has asked survey respondents about their pets. In September 2021, 66% of respondents stated that they have at least one animal at home or on their property.

This is consistent with the 2019-2020 National Pet Owners Survey by the American Pet Products Association (APPA), as well as with the prior versions of the BoA survey from September 2020 and March 2021. BoA wrote that the large number of pets in the United States indicates that they are in about 85 million homes. That huge number of pets form a favorable industry backdrop for pet specialty retailers such as San Diego, California-based Petco Health and Wellness Co., Inc. (NASDAQ: WOOF).

Additionally, 23% of the survey respondents in September 2021 had adopted a pet in the last six months, indicating that the growth in pet adoption during COVID-19 is still well above average, albeit at a decelerating pace compared to 37% in BoA’s September 2020 survey.

Petco received a price objective of $30 from BoA, offering a potential upside of 33.75%.

Chart courtesy of www.StockCharts.com

Walmart and Costco Are Big Retailers Included in the Five Back-to-School Stocks to Buy

Carlson, who leads the Retirement Watch investment newsletter, said he would not rule out the biggest retailers, Walmart (NYSE:WMT) and Costco (NASDAQ: COST). Both traditionally capture a big part of back-to-school buying and are likely to do that this year in their stores and online, he added.

Walmart, a Bentonville, Arkansas-based retail giant, reported revenue for fiscal second quarter ended July 30, 2021, of $141.0 billion, up 2.4%, weighed down $8.9 billion in divestitures. Excluding currency fluctuations, total revenue would have gained just 0.6% to $138.6 billion, the company reported on Aug. 17.

In addition, Walmart’s consolidated operating income for the just-ended second quarter reached $7.4 billion, up 21.4% from the same quarter a year ago. Consolidated operating income as a percentage of net sales climbed 83 basis points. Plus, Walmart’s adjusted earnings per share of $1.78 excluded the effects, net of tax, of net losses on equity investments of $0.26 per share.

When inflation rises, consumers tend to buy where their dollars gain maximum buying power, said Jim Woods, editor of the Successful Investing and Intelligence Report newsletters, as well the Bullseye Stock Trader advisory service. One approach is to own shares of Walmart, the biggest discount retailer in the world,

Woods recommends Walmart in his Intelligence Report Income Multipliers portfolio. The trade has been profitable for his subscribers.

Chart courtesy of www.StockCharts.com

Costco Earns Spot Among Five Back-to-School Stocks to Buy

BoA considers Seattle-based Costco (NASDAQ: COST) a “Buy” and continues to view the stock as well-positioned in the COVID-19 environment and long-term due to continued sales momentum, positive traffic comparisons and strong membership trends. Along with other back-to-school stocks, Costco should be helped by enhanced child tax credits that are likely to boost spending.

Chart courtesy of www.StockCharts.com

The BoA survey found that 55% of respondents that are either in school or have children in school are planning for a fully in-person school year. For that reason, the investment firm expected spending on certain categories of consumer electronics, such as laptops and webcams, to be lower than this time last year but a higher percentage of respondents actually stated that they have spent more on electronics than last year.

Most respondents that have school-age children or are in school themselves are either attending school in-person only or are on a hybrid schedule of remote and in-class learning. The percentage of those attending school completely remote dropped to 27% in September 2021 from 59% in September 2020, BoA reported.

Survey results show signs that consumer spending in home-related categories could slow as markets reopen and vaccine distribution expands, according to BoA. However, with the recent emergence of new variants of the virus, the reopening and return to pre-COVID consumer spending habits could be put on pause, the investment firm added.

Delta Variant of COVID-19 Affects Five Back-to-School Stocks to Buy

The highly transmissible Delta variant of COVID-19 has raised growing concerns from health experts about a rising spread of the virus across the United States. The Centers for Disease Control and Prevention (CDC) is blaming the variant for new jumps in case numbers and deaths.

However, the variant is leading to a rise in the number of people vaccinated from COVID-19. As of Sept. 14, 209,982,936 people, or 63.2% of the U.S. population, have received at least one dose of a COVID-19 vaccine. The fully vaccinated total 179,289,983 people, or 54%, of the U.S. population, according to the CDC.

COVID-19 cases worldwide, as of Sept. 14, total 225,778,167 and led to 4,648,145 deaths, according to Johns Hopkins University. U.S. COVID-19 cases reached 41,364,566 and caused 663,923 deaths. America has the dreaded distinction as the country with the most COVID-19 cases and deaths.

The five back-to-school stocks to buy can help investors to pursue profits from the traditional surge in sales each fall by backing companies that are reaping the biggest benefits.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of  StockInvestor.com and DividendInvestor.com,  a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many othersCall 202-677-4457 for special pricing!

 

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