In this article, we will take a look at the 10 cheap retail stocks to buy. To see more such companies, go directly to 5 Cheap Retail Stocks to Buy.
While the stock market crash of 2022 left a devastating impact on investor portfolios, long-term analysts believe the selloff has created some solid buying opportunities for investors who can wait. In its 2023 outlook report, JPMorgan said that lower valuations as a result of the 2022 market decline created “best long-term return potential in more than a decade.” The report said that despite the chances of a recession and several quarters of low growth, JPMorgan’s forecast for global trend growth over its 10- to 15-year investment horizon remains unchanged at 2.20%. Because the market is currently offering discounts for those who know where to look, we decided to discuss some retail stocks that have a lot of room to run in terms of their share price appreciation, according to Wall Street analysts. Our area of focus in this article would be the retail industry. Before diving into the list of cheap retail stocks, let’s first take a look at some industry dynamics of the retail world.
While major retailers posted strong Q4 earnings reports, their management teams were frank enough to share the uncertainties that lie ahead due to rising inflation and slowing consumer spending. For example, Best Buy’s management said that the company was preparing for another low year and more volatility.
Another major retailer Lowe’s also warned investors about the headwinds to come. Lowe’s CFO Brandon Sink said the following in the company’s latest earnings call:
“Given elevated levels of inflation, higher interest rates, and a more cautious consumer, we are forecasting a slight decline in the home improvement market. We expect to continue to outperform the market in 2023 with sales ranging from $88 billion to $90 billion. Comparable sales are expected to be in a range of flat to down 2%. Keep in mind that 2023 comparable sales will be calculated based on weeks two through 53 in fiscal 2022. Pro sales growth is expected to exceed DIY again in 2023 and as we expect to continue to outpace the broader Pro market growth by 2x.”
Consumer spending in the US still remains strong. In February, consumer spending jumped 0.2%. In January, consumer spending logged its biggest increase since March 2021. As JPMorgan’s Jamie Dimon recently noted in an interview, consumers are spending 10% more than last year and 40% more than before the pandemic. Dimon said that consumers still have enough excess money to spend until the end of this year. If the Federal Reserve begins to pause and eventually cut interest rates and we see a soft landing instead of a full-blown recession, US retailers could see the volatility recede and sales come back to normal.
Amid the rising inflation, consumers in the US are changing their spending patterns. Throughout 2022 and 2023, the continued rise in spending on travel and recreation have confused analysts. How could Americans keep spending on leisure when inflation is high and layoffs are rampant? One of the reasons behind this trend is that people are cutting back on buying stuff and spending more on activities and experiences. This trend was highlighted by Home Depot CFO Richard McPhail during the company’s Q4 earnings call in the following words:
Beginning in the second quarter of 2021 and continuing through the fourth quarter of 2022, we reported strong sales and earnings growth driven by ticket while transactions steadily normalized back towards 2019 levels as the broader consumer economy shifted from goods and back into services. During this time, we continued to report positive sales growth in every quarter up to present. As we set targets for 2023, the context of the past three years led us to consider three factors that will likely influence our performance this year. First, the starting point for our target setting this year is our assumption regarding consumer spending. We’ve assumed like many economists that we will see flat real economic growth and consumer spending in 2023. Second, over the last seven quarters, we have seen our transactions gradually normalize as consumer spending has shifted from goods to services. We believe that if this shift continues at its current pace, the home improvement market would be down low-single digits.
Photo by Dennis Siqueira on Unsplash
Despite these challenges, the long-term outlook for the retail industry is strong and there are several retail stocks that are trading at a discount.
Our Methodology
For this article, we used stock screeners to identify retail stocks whose price targets set by Wall Street analyst are much higher than their current stock prices as of April 4. We were able to find at least 30 stocks that have upside potential from their current levels based on analyst price targets. That means these stocks are cheap when compared to their true potential, according to analysts. We narrowed down our selection to 11 retail stocks with highest upside potential based on analyst price targets. With each stock we have mentioned its one-year average analyst price estimate, taken from Yahoo Finance. Some of the notable cheap retail stocks to buy include:
- Amazon.com, Inc. (NASDAQ:AMZN)
- Alibaba Group Holding Limited (NYSE:BABA)
- Lowe’s Companies, Inc. (NYSE:LOW)
- Lululemon Athletica Inc. (NASDAQ:LULU)
Cheap Retail Stocks to Buy According to Analysts
10. DICK’S Sporting Goods, Inc. (NYSE:DKS)
Number of Hedge Fund Holders: 40
One-Year Average Price Estimate: $162.95
DICK’S Sporting Goods, Inc. (NYSE:DKS) is on the rise after the company posted strong Q4 results and more than doubled its dividend. UBS analyst Michael Lasser increased his valuation multiple from 10x to 12x for DICK’S Sporting Goods, Inc. (NYSE:DKS). The analyst also increased his 2023 EPS forecast for DICK’S Sporting Goods, Inc. (NYSE:DKS).
Insider Monkey’s database of 943 hedge funds shows that 40 hedge funds had stakes in DICK’S Sporting Goods, Inc. (NYSE:DKS) at the end of 2022. The biggest hedge fund stakeholder of DICK’S Sporting Goods, Inc. (NYSE:DKS) was Stephen Mandel’s Lone Pine Capital which owns a $603 million stake. In addition to DKS, some of the other top retail stocks popular among hedge funds include Amazon.com, Inc. (NASDAQ:AMZN), Alibaba Group Holding Limited (NYSE:BABA) and Lowe’s Companies, Inc. (NYSE:LOW).
9. Walgreens Boots Alliance, Inc. (NASDAQ:WBA)
Number of Hedge Fund Holders: 42
One-Year Average Price Estimate: $40
With a trailing PE ratio of 5.98 and bullish price targets from analysts, Walgreens Boots Alliance, Inc. (NASDAQ:WBA) ranks 9th in our list of the cheap retail stocks to buy. Recently, Walgreens Boots Alliance, Inc. (NASDAQ:WBA) posted fiscal second quarter results. Adjusted EPS in the quarter came in at $1.16, beating estimates by $0.05. Revenue in the quarter jumped 7.6% year over year to total $34.9 billion, beating estimates by $1.34 billion. Walgreens Boots Alliance, Inc. (NASDAQ:WBA) maintained its full-year EPS guidance of $4.45 to $4.65 versus the consensus estimate of $4.50.
A total of 42 hedge funds tracked by Insider Monkey had stakes in Walgreens Boots Alliance, Inc. (NASDAQ:WBA). The total worth of these stakes was $1.1 billion. The biggest stakeholder of Walgreens Boots Alliance, Inc. (NASDAQ:WBA) was Paul Marshall and Ian Wace’s Marshall Wace LLP, which had a $77 million stake in the company.
8. Bath & Body Works, Inc. (NYSE:BBWI)
Number of Hedge Fund Holders: 46
One-Year Average Price Estimate: $50.12
As of April 5, Bath & Body Works, Inc. (NYSE:BBWI) was trading at around $35, while the stock’s one-year average price target is $50.12. Bath & Body Works, Inc. (NYSE:BBWI) jumped in March after a Bank of America survey showed that only 4% of respondents are unaware of the brand and 15% liked the brand more than last year.
As of the end of the fourth quarter of 2022, 46 hedge funds tracked by Insider Monkey were bullish on Bath & Body Works, Inc. (NYSE:BBWI).
Third Point made the following comment about Bath & Body Works, Inc. (NYSE:BBWI) in its Q4 2022 investor letter:
“We initiated a position in Bath & Body Works, Inc. (NYSE:BBWI) earlier in the year that we added to significantly in the Fourth Quarter. The company, which sells personal care and home fragrance products, separated from Victoria’s Secret in late 2021 and has struggled to find its footing in the public markets. Bath & Body Works was challenged by the normalization of trends following the pandemic, but also suffered from execution hiccups that made matters worse. On the operations front, the company spent much of 2022 without a permanent CEO, cut guidance multiple times given inventory and cost pressures, and did a poor job communicating meaningful increases in the company’s cost structure as a standalone business. On the capital allocation front, the execution of an accelerated share repurchase program was sloppy at best.
Despite these recent struggles, we believe BBWI can change its equity story, improve its earnings power, and earn a more premium valuation. The recent appointment of a new CEO, Gina Boswell from Unilever, is an encouraging first step…” (Click here to read the full text)
7. PDD Holdings Inc. (NASDAQ:PDD)
Number of Hedge Fund Holders: 57
One-Year Average Price Estimate: $107.84
With a PE Ratio of 22 and a strong upside potential based on average analyst price targets, Chinese online retailer PDD Holdings Inc. (NASDAQ:PDD), famously known as Pinduoduo, ranks 7th in our list of the cheap retail stocks to buy according to analysts. PDD Holdings Inc. (NASDAQ:PDD) is, however, currently under pressure after the company posted weak Q4 results. Adjusted EPADS in the period came in at $1.21, missing estimates by $0.03. Revenue in the quarter increased by 46% year over year to $5.77 billion, still missing estimates by $140 million. PDD Holdings Inc. (NASDAQ:PDD) gained investors’ attention, however, by posting strong free cash flows after reporting negative FCF for several months.
As of the end of the fourth quarter of 2022, 57 hedge funds tracked by Insider Monkey had stakes in PDD Holdings Inc. (NASDAQ:PDD). The most notable stakeholder of PDD Holdings Inc. (NASDAQ:PDD) was DE Shaw with a $468 million stake.
6. The Home Depot, Inc. (NYSE:HD)
Number of Hedge Fund Holders: 62
One-Year Average Price Estimate: $327.56
Evercore ISI analyst Gregory Melich and team recently called The Home Depot, Inc. (NYSE:HD) one of their long-term picks. The team believes the home improvement market in the US is strong fueled by industry growth and robust spending levels. The Evercore ISI team said The Home Depot, Inc. (NYSE:HD) is “uniquely positioned to benefit from Nesting and potentially de-densification as well.” They team also likes the company’s penetration and success of its Pro program.
As of the end of the fourth quarter of 2022, 62 hedge funds tracked by Insider Monkey had stakes in The Home Depot, Inc. (NYSE:HD). The biggest stakeholder of The Home Depot, Inc. (NYSE:HD) was Diamond Hill Capital of Ric Dillon which had a $40 billion stake in the company. Like HD, hedge funds also love Amazon.com, Inc. (NASDAQ:AMZN), Alibaba Group Holding Limited (NYSE:BABA) and Lowe’s Companies, Inc. (NYSE:LOW).
Matrix Asset Advisors made the following comment about The Home Depot, Inc. (NYSE:HD) in its Q3 2022 investor letter:
“During the quarter, we re-established a position in The Home Depot, Inc. (NYSE:HD) sold earlier this year, after the shares declined sharply on big picture concerns about a softer housing market and lower consumer spending. We believe that HD is a very well-managed company, positioned to continue showing good profits even as the economy decelerates. The products it carries in inventory are in year-round demand from contractors and homeowners wanting to maintain and improve their homes. The company has historically been shareholder friendly, repurchasing shares and increasing the dividend, most recently by 15% earlier this year. On September 30, HD’s current dividend yield was 2.8%.”
Click to continue reading and see 5 Cheap Retail Stocks to Buy.
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Disclosure: None. 10 Cheap Retail Stocks to Buy is originally published on Insider Monkey.
