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Sydnee Gatewood
Sydnee Gatewood
Articles (2475) 

Popular Retail Stocks to Consider Following Record Monthly Sales Growth

US retail sales surged 17.7% in May

The U.S. stock market indexes rallied in premarket trading on Tuesday on a record 17.7% increase in retail sales for May as consumers who had been in coronavirus-induced lockdowns began to venture out to shop again.

The gain easily topped the previous record, which was set in October 2001, and beat analysts expectations of an 8% increase for the month.

Based on these developments, investors may be interested in retailers companies that are popular among gurus. According to GuruFocus Hot Picks, a Premium feature, retail stocks that had the largest number of buys during the first quarter were American Eagle Outfitters Inc. (NYSE:AEO), L Brands Inc. (NYSE:LB), Kohls Corp. (NYSE:KSS), TJX Companies Inc. (NYSE:TJX) and Gap Inc. (NYSE:GPS).

American Eagle Outfitters

With eight guru buys during the quarter and a combined portfolio weight of 1.21%, American Eagle tops the list of popular retail stocks.

The Pittsburgh-based company, which sells mens and womens apparel, has a $2.16 billion market cap; its shares were trading around $12.80 on Tuesday with a price-earnings ratio of 11.59, a price-book ratio of 2.14 and a price-sales ratio of 0.55.

The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued. The GuruFocus valuation rank of 6 out of 10 also supports this assessment.

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GuruFocus rated American Eagles financial strength 4 out of 10 on the back of an Altman Z-Score of 2.39, which indicates it is under some pressure since its assets are building up at a faster rate than revenue is growing. Its return on invested capital is also below the weighted average cost of capital, indicating it spends more than it makes.

The companys profitability fared better with an 8 out of 10 rating, driven by an expanding operating margin and a moderate Piotroski F-Score of 4, which implies business conditions are stable. Its returns, however, underperform over half of its competitors. The predictability rank of one out of five stars is also on watch as a result of a slowdown in revenue per share growth over the past 12 months. According to GuruFocus, companies with this rank typically return an average of 1.1% annually over a 10-year period.

Of the 12 gurus invested in American Eagle, Jim Simons (Trades, Portfolio) Renaissance Technologies has the largest stake with 1.6% of outstanding shares. Gurus who bought the stock during the first quarter were Lee Ainslie (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Richard Snow (Trades, Portfolio), Hotchkis & Wiley, Paul Tudor Jones (Trades, Portfolio), NWQ Managers (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).

L Brands

L Brands is the second most popular retail stock with seven guru buys and a combined portfolio weight of 3.7%.

Headquartered in Columbus, Ohio, the retail company, which owns the Pink, Victorias Secret and Bath & Body Works brands, has a market cap of $4.62 billion; its shares were trading around $16.69 on Tuesday with a forward price-earnings ratio of 55.55 and a price-sales ratio of 0.39.

According to the median price-sales chart, the stock is undervalued. The GuruFocus valuation rank of 9 out of 10 agrees with this assessment.

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L Brands financial strength was rated 3 out of 10 on the back of weak interest coverage and a low Altman Z-Score of 1.04, which warns the company could be at risk of going bankrupt. The WACC also surpasses the ROIC, suggesting poor profitability. Its assets are also building up at a faster rate than its revenue is growing, indicating it may be becoming less efficient.

Despite having declining margins and negative returns that underperform a majority of industry peers, the companys profitability scored an 8 out of 10 rating. L Brands is also supported by a moderate Piotroski F-Score of 4 and a four-star predictability rank, which is on watch as a result of declining revenue per share over the past year. GuruFocus says companies with this rank typically return an average of 9.8% per year.

With a 9.5% stake, Steve Mandel (Trades, Portfolio) is the companys largest guru shareholder. Gurus who bought the stock during the quarter were Mandel, Cohen, Ainslie, Bernard Horn (Trades, Portfolio), John Hussman (Trades, Portfolio), Philippe Laffont (Trades, Portfolio) and Greenblatt.

Kohls

Kohls is number three on the list of popular retail stocks with seven guru buys during the quarter and a combined portfolio weight of 0.91%.

The Menomonee Falls, Wisconsin-based department store chain has a $4 billion market cap; its shares were trading around $24.97 on Tuesday with a price-earnings ratio of 51.82, a price-book ratio of 0.82 and a price-sales ratio of 0.21.

Based on the Peter Lynch chart, the stock appears to be overvalued. The GuruFocus valuation rank of 9 out of 10, however, leans more toward undervaluation.

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GuruFocus rated Kohls financial strength 5 out of 10 on the back of low interest coverage and an Altman Z-Score of 2.78, which indicates it is under some pressure. It also has low profitability since the ROIC is below the WACC.

The companys profitability scored an 8 out of 10 rating despite having declining margins and returns that underperform at least half of its competitors. Kohls also has a moderate Piotroski F-Score of 5 and a three-star predictability rank, which is on watch as a result of declining revenue per share over the past year. GuruFocus data shows companies with this rank post an average annual return of 8.2%.

The T Rowe Price Equity Income Fund (Trades, Portfolio) is the companys largest guru shareholder with a 2.13% stake. Other gurus who bought the stock during the quarter included Simons firm, Pioneer, Greenblatt, Caxton Associates (Trades, Portfolio), Jones and Chuck Royce (Trades, Portfolio).

TJX Companies

With seven guru buys for the quarter and a combined weight of 6.42%, TJX Companies takes the fourth spot among popular retailers.

The discount retailer of apparel and home goods, which is headquartered in Framingham, Massachusetts, has a market cap of $66.58 billion; its shares were trading around $55.36 on Tuesday with a price-earnings ratio of 40.57, a price-book ratio of 14.05 and a price-sales ratio of 1.84.

The Peter Lynch chart suggests the stock is overvalued.

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TJXs financial strength was rated 5 out of 10 by GuruFocus on the back of adequate interest coverage and a high Altman Z-Score of 4.07, which indicates it is in good standing even though its assets are building up at a faster rate than revenue is growing.

The companys profitability scored 9 out of 10 rating. Even though its operating margin is in decline, it still outperforms over half of its industry peers. TJX also has strong returns, a moderate Piotroski F-Score of 4 and a 4.5-star predictability rank, which is on watch as a result of a decline in revenue per share over the past year. According to GuruFocus, companies with this rank return, on average, 10.6% per year.

Of the gurus invested in TJX, PRIMECAP Management (Trades, Portfolio) has the largest stake with 1.28% of outstanding shares. Gurus who bought the stock during the first quarter were Jeremy Grantham (Trades, Portfolio), Cohen, Greenblatt, Louis Moore Bacon (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Richard Snow (Trades, Portfolio) and Hussman.

Gap

Number five on the list of top retail stocks is Gap, which six gurus bought shares of during the first quarter. The stock has a combined portfolio weight of 3.33%.

The San Francisco-based retailer, which owns the Gap, Old Navy, Banana Republic and Athleta brands, has a $4.15 billion market cap; its shares were trading around $11.08 on Tuesday with a forward price-earnings ratio of 15.63, a price-book ratio of 1.78 and a price-sales ratio of 0.29.

According to the Peter Lynch chart, the stock is fairly valued. The GuruFocus valuation rank of 7 out of 10 leans more toward undervaluation however.

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GuruFocus rated Gaps financial strength 3 out of 10 on the back of a low cash-debt ratio of 0.14 and an Altman Z-Score of 1.46, which warns the company could be in danger of bankruptcy. The retailer may also be becoming less efficient since its assets are building up at a faster rate than revenue is growing.

The companys profitability fared better, scoring an 8 out of 10 rating even though its margins are in decline and its returns are negative and underperform a majority of competitors. Gap also has a moderate Piotroski F-Score of 4 and the 3.5-star predictability rank is on watch as a result of a decline in revenue per share over the past five years. GuruFocus says companies with this rank return 9.3% on average per year.

With a 7.69% stake, Dodge & Cox is the companys largest guru shareholder. It added to its position during the first quarter, along with the Parnassus Endeavor Fund (Trades, Portfolio), Greenblatt, Pioneer, Cohen and Caxton Associates (Trades, Portfolio).

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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