Six Retail Stocks to Buy for Profiting from Holiday Season Sales

Paul Dykewicz

Six retail stocks to buy for profiting from holiday season sales and the year ahead highlight the value of focusing on sector leaders.

The six retail stocks to buy for profiting from holiday sales and future growth opportunities feature top-tier companies in specialty, home improvement, discount, restaurant and internet business segments. Those six retail stocks to buy for profiting during upcoming holiday shopping are expected to perform strongly compared with their competitors, according to BofA Securities.

In contrast with last year when COVID-19 kept many shoppers out of malls and brick-and-mortar stores, the 2021 holiday gift-buying season should usher in strong comparable sales and profits in most categories as comfort with in-person shopping grows, BofA wrote in a recent research note. Even though many consumers are returning to in-person shopping, BofA forecasts an increased preference for gift cards — both physical and digital — by those who may remain hesitant to shop in public places while COVID-19 cases and deaths continue to pose a threat.

Six Retail Stocks to Buy for Profiting Could Rise from Secular Growth

BofA projects that comparable holiday sales-weighted average should rise 4.9% year over year (y/y), or 5.1% when factoring out Walmart (NYSE: WMT), which accounts for 30% of total group sales in the investment firm’s retail coverage universe. Store capacity limits, reduced store hours and stay-at-home mandates across many regions of the United States hurt sales last year but those effects should be lessened this year, BofA wrote.

“Many investors who don’t delve into the details of how S&P classifies stocks can miss opportunities,” said Bob Carlson, who leads the Retirement Watch investment newsletter. “Investing in retailers is one case.”

Many firms that investors may consider to be retailers are classified in the Consumer Discretionary sector by S&P, continued Carlson, who serves as chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets. One way that Carlson recommends investing in the sector is to purchase the exchange-traded fund (ETF) iShares U.S. Consumer Discretionary (IYC).

The top holding of IYC is Amazon (NASDAQ: AMZN), which is 13.48% of the fund, Carlson said. Other large holdings and their weightings in the fund are Tesla (NASDAQ: TSLA; 9.40%), Home Depot (NASDAQ: HD; 4.49%), Walt Disney (NYSE: DIS; 4.06%), and Netflix (NASDAQ: NFLX; 3.92%), Carlson commented. Further companies that compose the 10 largest positions in IYC and are likely to benefit from a strong retail season are Costco Wholesale Corp. (NASDAQ: COST), Nike Inc. (NYSE: NKE), Walmart (NYSE: WMT) and Lowe’s Companies (NYSE: LOW).

Retirement Watch chief Bob Carlson talks to Paul Dykewicz.

Bath & Body Works Rates Among Six Retail Stocks to Buy

In the specialty retail category, BofA’s top pick is Bath & Body Works (BBWI), an “undervalued” growth company. BBWI is viewed by BofA as offering “strong demand” as teacher gift buying resumes and its domestic manufacturing limits supply-chain risks.

BBWI received a “Buy” recommendation and a $90 price objective from BofA. The investment firm called Bath & Body Works one of the best positioned retailers going into the holiday season and into 2022.

Chart courtesy of www.stockcharts.com

The stock currently trades at a discount to both makeup and personal care peers, while offering one of the most consistent growth stories in retail with room for upward estimate revisions, BofA wrote. A return to normalized gift giving will aid demand for candles, lotions and gift packs, the investment firm predicted.

BBWI’s primarily domestic supply chain, accounting for more than 90% of its total goods, insulates it from the factory shutdowns and delays in international shipping that are putting other retailers’ deliveries at risk, BofA wrote. Plus, BBWI’s only imports are packaging components, such as candle lids and soap pumps, that are sourced from China.

This reduced risk positions BBWI to gain market share during the holiday, if delays hamper the deliveries of other goods. After benefiting from COVID-19 demand, second-half comparisons will be tough, but BofA estimates more normalized sales growth through fiscal year 2023 at 7%.

Lowe’s Lands on List of Six Retail Stocks to Buy for Holiday Potential

Home improvement company Lowe’s now holds increased negotiating power with suppliers and transportation partners compared to smaller scale home improvement retailers, according to BofA. The investment firm estimates that LOW is adequately stocked for the holiday season given that the company has been building up its inventory levels in recent quarters.

“The ongoing industry-wide supply chain issues are unlikely to pose serious threats to LOW given that its overseas exposure is small,” BofA wrote. “As a big-box retailer, LOW has more negotiating power with suppliers and transportation partners compared to smaller scale retailers in the home improvement sector.”

Veteran stock picker Jim Woods, who leads the Intelligence Report and Successful Investing newsletters, as well as the Bullseye Stock Trader advisory service, includes Lowe’s among his recommendations. Specifically, Woods recommends LOW in his Intelligence Report Income Multipliers portfolio. That stock has been a profitable pick for his subscribers since he added it.

Paul Dykewicz interviews Jim Woods, who recommends Lowe’s in Intelligence Report.

Home improvement spending is trending at solid double-digit-percentage growth levels vs. 2019, according to BAC’s aggregated credit and debit card data, consistently above BofA’s expectations. LOW, a “Buy” recommendation of BofA with a $281 price objective, recently launched a kitchen design program and completed the migration of “Lowe’s For Pros” to the cloud in second-quarter 2021, the investment firm noted.

“We believe the company will be able to leverage the enhanced omni-channel capabilities to better fulfill consumer demand this holiday season,” BofA wrote.

Chart courtesy of www.stockcharts.com

Walmart and Target Join Six Retail Stocks to Buy for the Holidays

BofA’s two top picks in the discount retail sector are Walmart and Target (NYSE: TGT) due to their strong inventory positions, favorable port access, long-term container shipping agreements and chartered vessel capacity, according to BofA. Both WMT and TGT, while not immune to the current challenging supply chain and rising cost environment, are particularly well positioned relative to the broader competitive retail landscape heading into the holiday, the investment firm concluded.

Walmart and Target should gain share from smaller competitors this holiday that lack scale and face more shortages due to the challenging supply-chain environment, BofA wrote. The two big discount retailers also should see reduced labor cost pressure and shortages, after giving workers “significant wage increases” in the last year-and-a-half, BofA opined.

Both Walmart and Target continue taking share in the Food Retail sector, with Nielsen trends having shifted in favor of the two companies since March. BofA wrote that the pair should benefit from omni-channel leadership, which could be a significant advantage this holiday season if shipping cut-off dates are moved up earlier due to a challenging freight and logistics environment for pure online retailers. BofA gave both big discount retailers “Buy” recommendations, while offering price objectives of $190 to Walmart and $317 to Target.

Chart courtesy of www.stockcharts.com

Chart courtesy of www.stockcharts.com

Starbucks Stands out With Six Retail Stocks to Buy for Profiting

The top restaurant stock of BofA is Starbucks (NASDAQ: SBUX), whose high gift card sales should bring strengthened demand. That sweet outlook spurred BofA to give SBUX a “Buy” rating and a price objective of $135.

Starbucks is gaining growing demand in its stores across all geographies – even as COVID continues to limit consumer mobility, according to BofA. The company’s momentum should continue through the holiday season on the strength of demand for new and returning seasonal beverages, as well as Starbucks’ brand building and transaction-focused marketing programs, the investment firm opined.

“We believe SBUX is positioned to benefit from increased interest in gift cards as it leverages digital and out-of-store channels and creates a promotional presence in the drive-through lanes that, along with Mobile Order & Pay, account for 70% of transactions,” BofA wrote. “While Starbucks faces supply-chain pressures, it has added new manufacturing and supply partners and is seeing inventory constraints ease in key categories.”

Those key categories include plant-based milk, as suppliers build production capacity. Given accelerating topline growth and considerable “latent pricing power,” Starbucks’ price hikes have meaningfully lagged the industry’s roughly 5% climb. Starbucks has the clout to offset margin pressure from supply chain and labor, suggesting its management’s margin guidance is likely to prove conservative, BofA noted.

Chart courtesy of www.stockcharts.com

Amazon Joins Six Retail Stocks to Buy for Profiting Amid Holidays

The top internet retail stock is Amazon (NASDAQ: AMZN), as its accelerated investments in fulfillment and shipping should mitigate supply chain bottlenecks, according to BofA. Even though Amazon’s growth has slowed in 2021 and competitive concerns have increased as Amazon is accelerating investment in one-day shipping, the online retailer is gaining U.S. ecommerce market share, according to BAC card spending data.

For 2022, BofA projects easier y/y comparisons, increasing product availability and expected improvements in shipping times after its investments in fulfillment should spur stepped-up growth. Amazon’s cloud business also is an industry leader and, while some regulatory and conglomerate discount may be warranted, based on a sum of parts model, BofA pegs its upside potential to top $4,500. Officially, BofA rates Amazon as a “Buy” and gave it a price objective of $4,250.

Chart courtesy of www.stockcharts.com

Headwinds to Worsen in Back Half for Six Retail Stocks to Buy

The retail industry has faced significant supply-chain headwinds in recent quarters. Freight costs are at record levels, as much as 200%-plus beyond pre-pandemic perches, as consumer demand outstrips available fleets. In addition, port congestion is delaying delivery and Vietnam factory closures have curtailed production, BofA reported.

Expect these headwinds to worsen in the back half of the year, BofA commented. Restaurants likewise face commodity inflation, with many retailers and restaurants adjusting prices upward and limiting promotions to account for the scarcity of goods and increased freight and labor costs.

“Decreased promotional activity and more full-price sell-through should serve to offset cost increases in most cases,” BofA wrote.

BAC’s aggregated credit and debit card data showed that spending stayed positive across all income cohorts. A declining savings rate and increasing revolving credit could suggest growing consumer willingness to spend and borrow going into the holiday season. Despite robust spending, the elevated Consumer Price Index, as well as higher gas prices, could limit overall volumes this holiday season as purchasing power declines, BofA commented.

COVID-19 Will Not Play Scrouge to Six Retail Stocks to Buy

The highly transmissible Delta variant of COVID-19 has led to reduced numbers of cases and deaths in the United States recently but it remains a concern for public health experts who still urge increased vaccinations and booster shots, as well as mask wearing. The Centers for Disease Control and Prevention (CDC) specifically has held the variant responsible for unleashing a resurgence of cases and deaths early in the fall.

However, the variant is leading to a jump in the number of people vaccinated from COVID-19. As of Nov. 9, 224,257,467 people, or 67.5% of the U.S. population, have received at least one dose of a COVID-19 vaccine, the CDC reported. The fully vaccinated total 194,168,611 people, or 58.5%, of the U.S. population, according to the CDC.

COVID-19 deaths worldwide, as of Nov. 9, topped the 5 million mark, reaching 5,062,943, according to Johns Hopkins University. Worldwide COVID-19 cases topped 250 million, hitting 250,784,268, as of that date.

U.S. COVID-19 cases, as of Nov. 9, reached 46,686,562 and caused 757,181 deaths. America has the dreaded distinction as the nation with the most COVID-19 cases and deaths.

The six retail stocks to buy for profiting through the holiday selling season and in the new year give investors ways to gain from the yuletide spirit that should surmount the pandemic and bring glad tidings in the months ahead.

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 multiple-book pricing.

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Most investors that pay any attention to technical analysis agree that the market is overbought in terms of the major averages. Thus, I suspect that there will be a period of consolidation over the next two weeks, with the rally resuming itself after the Thanksgiving holiday weekend. The SPDR S&P 500 ETF Trust (SPY) is trading up to $470, with its 50-day moving average down at $447, or 4.9% below where it closed on Friday. The 20-day moving average comes in at $453, or 3.6% below Friday

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