Consumer cyclical stocks have done pretty badly this year, with the sector down 35% in 2022 compared to the S&P 500’s decline of 19%. Even though wage growth has been stronger than expected amidst labor shortages, it has still failed to keep up with inflation, meaning consumers have less money to spend on retail purchases.
Not even the holidays have managed to buck this trend. While retail sales got a boost on Black Friday, they were still down 0.6% year over year without even adjusting for inflation, according to data from the U.S. Department of Commerce. When inflation as tracked by the consumer price index is factored in (the CPI was 7.1% for November), that means retail sales really declined 7.7% despite benefitting from the biggest shopping day of the year.
While the short-term situation for retailers does notlook bright, the good news for investors is that many retail stocks have gone on sale. According to the GuruFocus All-in-One Screener, a Premium feature, three retail stocks that have gone on sale and have been popular buys among the investing gurus lately are Pinduoduo Inc. (PDD, Financial), Children's Place Inc. (PLCE, Financial) and RH (RH, Financial).
Pinduoduo
Pinduoduo (PDD, Financial) is a Chinese tech company that focuses on agricultural e-commerce, connecting farmers and consumers through its interactive social commerce platform. By enabling this massive online farmer’s market, it helps improve profits for farmers and reduce costs for consumers.
This company’s strength comes from its narrow specialization in agricultural e-commerce. It is a disruptor that is helping get food to market faster than might otherwise be possible by connecting a huge network of farmers and consumers as well as building a technology platform to improve the efficiency of the food supply chain with more productive agricultural practices and predictive modeling.
Shares of Pinduoduo were trading around $85.81 apiece on Dec. 20 for a market cap of $108.60 billion and a price-earnings ratio of 28.64. The GF Value chart rates the stock as significantly undervalued.
Gurus have been mostly bullish on the stock in recent years, though they did sell more shares in the first and second quarters of 2022 before becoming net buyers again in the third quarter. Baillie Gifford (Trades, Portfolio) and Ray Dalio (Trades, Portfolio)’s Bridgewater have been among the recent buyers of the stock, while sellers include Ken Fisher (Trades, Portfolio) and Steven Cohen (Trades, Portfolio). As of the end of the third quarter, the stock appeared in the portfolios of 14 Premium gurus.
Children's Place
Children's Place (PLCE, Financial) is a New Jersey-based retailer of children’s apparel and accessories. It operates under the brand names The Children’s Place and Gymboree and has approximately 1,085 stores in the U.S., Canada and Puerto Rico, with 90 locations in other countries. It is the largest pure-play children’s apparel company in North America.
On the surface level, the business has recovered well from losses related to Covid-19, at least on the earnings and revenue front. However, it had to take on massive amounts of debt in 2020, bringing its cash-debt ratio down to 0.04 and making its top line less valuable than it would have been in the past. Nevertheless, the company continues to adapt to new market realities, and its strong brand recognition has helped digital sales grow to account for 50% of total sales in the third quarter of 2022.
Children’s Place traded around $34.70 per share on Dec. 20 for a market cap of $424.30 million and a price-earnings ratio of 5.46. Shares are significantly undervalued based on the GF Value chart.
Overall, gurus have had mixed opinions on the stock in recent years, but the third quarter marked a significant resurgence in guru buys. Those buying the stock included Chuck Royce (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio), while those selling the stock included Jim Simons (Trades, Portfolio)’ Renaissance Technologies and Keely-Teeton Advisors. There were eight gurus who held the stock as of the quarter’s end.
RH
Previously known as Restoration Hardware, RH (RH, Financial) is a home furnishings company that has managed to revive itself in recent years by focusing on providing customers with the best quality. Founder Stephen Gordon took matters into his own hands when he became frustrated with not being able to find affordable high-quality hardware and fixtures while restoring a Victorian home. After being taken private in 2008, the company hit the public markets again in 2012.
The company has adopted a unique strategy of embracing brick-and-mortar stores even as industry peers focus on shrinking their retail footprints and moving online, claiming that it is not the internet that is killing the brick-and-mortar space, but a lack of creativity. While customers may be doing more shopping online these days, those who are going out are often looking for better experiences, which RH delivers with grand galleries that showcase its wares and double as social destinations.
On Tuesday, RH’s share price traded around $260.05 for a market cap of $6.40 billion and a price-earnings ratio of 9.92. The GF Value chart warns the stock may be a possible value trap due to how sharp the share price decline has been, but this rating may have been unfairly skewed by the stock’s extreme overvaluation during the Covid market bubble.
With the exception of just a couple of quarters in 2020, gurus have been net buyers of RH stock for the past few years, with many even buying during the stock’s price peaks throughout 2021. Those who bought shares in the third quarter of 2022 included Chris Davis (Trades, Portfolio) and Warren Buffett (Trades, Portfolio), while sellers included Lee Ainslie (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio). At the end of the third quarter, there were eight gurus with positions in the stock.
