In this article, we will look at the 10 Cheap Retail Stocks to Buy According to Analysts. Let’s look at where Macy’s, Inc. (M) stands against other cheap retail stocks to buy according to analysts.
Overview of Recent Consumer Buyer Trends and the Retail Sector
On September 18, the Fed cut interest rates for the first time since the Covid-19 pandemic, slashing the benchmark rate by half a percentage point. This brought to a range between 4.75% and 5%. The adjustment aims to relieve consumers and businesses suffering from high borrowing costs and protect the labor market, which was showing signs of slowing. This strategic move by the Fed is interpreted as a sign of relaxation against inflation and a welcome change for businesses and consumers.
Although the impact of the lower interest rates is expected to be substantial, it will likely take time to make its way through the economy. The prospect has, however, strengthened confidence in Americans that inflation will continue to cool, paving the way for good days ahead. According to research by BCG, consumer confidence is already recovering, albeit slowly, across the world and in the US. With people increasingly believing that their personal finances are improving, the sentiment is likely to continue on an upward trajectory if circumstances do not change.
A recent survey by the Center for Customer Insight (CCI) suggests that the extent to which increasing consumer confidence will translate into increasing consumer spending is likely to vary across markets and product categories. The survey reported that the percentage of respondents with personal finance concerns dwindled from 39% in 2023 to 26% in 2024. These trends are significant for retailers, as the financial health of consumers in the country affects the categories and services they prioritize when spending money.
The Future of the Retail Sector
According to the WTW Global Retail Survey for 2024, around 52% of retailers this year expect increased profitability in the coming two years. In addition, approximately 48% of retailers are looking to leverage artificial intelligence in their operations to offer their customers a personalized and efficient shopping experience. However, with more and more businesses turning towards AI, around 43% of the respondents voiced concerns about high cybersecurity risks likely to arise with increasing reliance on new technologies. Despite the risks, a majority of retailers are incorporating AI into their operations, streamlining and expediting their functioning.
On June 24, Simeon Gutman, an analyst at Morgan Stanley, joined CNBC’s “The Exchange” to discuss the impact of tech and AI on retailers and how these companies are leveraging technology to boost profit margins. Here is what to say about retail companies in this respect:
“Walmart’s the one that comes to mind the first…, you’re hitting the nail on the head with several of these aspects of tech diffusion, and on top of it, they’re gaining market share in terms of tech diffusion. AI is easily one of them, big scale, lots of data, a lot of opportunity to go through their data and enhance both the frontend of their business, drive more sales to customers, make things easier, and improve the backend.”
According to Gutman, big-box retailers are taking the lead in infusing tech and AI into their internal operations, increasing profit margins and streamlining operations. Such innovative trends may allow the retail industry to bounce back in the market, taking the lead and leading the change.
Our Methodology
We first consulted stock screeners from Finviz and Yahoo Finance, along with online rankings, to create an initial list of 15 publicly traded retail companies with a forward P/E ratios of less than 23 (the broader market is trading at a forward P/E of 23, as per data from WSJ). From this list, we selected the 10 stocks with the highest analyst upside potential as of September 23, 2024, and used that as our ranking metric.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Cheap Retail Stocks to Buy According to Analysts
Macy’s, Inc. (NYSE:M)
Forward P/E: 5.59
Analyst Upside Potential as of September 23, 2024: 11.33%
Number of Hedge Fund Holders as of Q4 2024: 44
Macy’s (NYSE:M) is an omnichannel retail company that operates department stores, websites, and mobile applications under three brands: Macy’s, Bloomingdale’s, and Bluemercury. It sells a wide range of merchandise, including apparel, home furnishing, cosmetics, accessories, and a number of other consumer goods. It operates in 43 states, Puerto Rico, Guam, and the District of Columbia. Macy’s (NYSE:M) has an elaborate portfolio of brands, including Macy’s, Macy’s Backstage, Macy’s small format, Bloomingdale’s, Bloomingdale’s The Outlet, Bluemercury, and Bloomie’s. It also operates in Dubai, United Arab Emirates, and Al Zahra, Kuwait, through a license agreement with Al Tayer Insignia.
Over the past three years, the company’s annual revenue has grown at a CAGR of 2.34%. Total Q2 2024 revenue of $5.10 billion also underwent a 1.15% one-year increase when compared to last year. Macy’s (NYSE:M) is improving its operational structure by closing down stores with inadequate sales and opening small-format stores in their place. It has plans in place to open around 30 new small-format stores through 2025. It is also addressing weaknesses in men’s apparel, home, and handbags.
To work on the opportunity in men’s apparel, the company is launching a new private brand targeting the under 40 consumers to support their growth goals. In addition, it is diversifying its brand portfolio in handbags. Apart from increasing demand for Coach’s new product assortment, Lauren by Ralph Lauren and Karl Lagerfeld are gaining public attention. In the home segment, the company is strengthening its holiday gift-giving assortment and planning a broad private brand reimagination for the coming year.
Macy’s (NYSE:M) is adjusting to changing consumer behavior to mirror its growth mindset by pulling back in areas with soft growth and protecting the ones with momentum. It is evolving its products through close partnerships with vendors and serving its customers better through owned, marketplace, and concession. It is also improving its digital standing, focusing on search engine optimization, site enhancements, transparent pricing, and a better mobile experience.
As of Q2 2024, 44 hedge funds hold stakes in Macy’s (NYSE:M), with Arrowstreet Capital being the most prominent shareholder with 9.5 million shares.
Overall, M ranks eighth among the 10 cheap retail stocks to buy according to analysts. While we acknowledge the potential of M as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than M but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
