In this article, we will look at the 10 Cheap Retail Stocks to Buy According to Analysts. Let’s look at where Target Corporation (TGT) 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
Target Corporation (NYSE:TGT)
Forward P/E: 16.34
Analyst Upside Potential as of September 23, 2024: 15.12%
Number of Hedge Fund Holders as of Q2 2024: 52
Target (NYSE:TGT) is a retail giant with over 2,000 discount department stores and hypermarkets across the US and Canada. It serves its customers, referred to as guests, an array of items, including everyday essentials, fashionables, differentiated merchandise at discounted prices, and an array of general merchandise and food. Its merchandise categories span apparel and accessories, food and beverages, home furnishing and decor, and others. Target’s (NYSE:TGT) digital channels also include an elaborate assortment of merchandise and food, including the items sold in its stores and a complementary assortment sold by third parties and the company itself. Its brand portfolio includes Cloud Island, Ava & Viv, A New Day, Favorite Day, and others.
Target (NYSE:TGT) is not just returning to growth but is also exceeding analyst expectations with its operations. Comparable sales in Q2 2024 increased by 2%, driven entirely by traffic. This shows that the company’s multiple guest-focused initiatives are working. Its store and digital channels also saw growth in Q2, further solidifying the company’s presence in the market. Target (NYSE:TGT) already holds a competitive market edge due to its reputation as a retailer. With traffic growth in all six merchandising categories of the Company, customers seem to be coming back to Target (NYSE:TGT). Sales in apparel, one of its key categories, rose by 3%. Its discretionary categories comprise a significant portion of its revenue and are also improving.
As of Q2 2024, Target (NYSE:TGT) is held by 52 hedge funds as of Q2 2024, with Diamond Hill Capital holding the highest stake worth $458.13 million.
Carillon Eagle Growth & Income Fund stated the following regarding Target Corporation (NYSE:TGT) in its Q2 2024 investor letter:
“Target Corporation’s (NYSE:TGT) sales continue to feel the consumer softness in discretionary goods. In addition, while margins are recovering, they are not up to expectations. Encouragingly, sales are sequentially increasing, and comparable sales are expected to get easier as Target enters the back half of the year.”
Overall, TGT ranks sixth among the 10 cheap retail stocks to buy according to analysts. While we acknowledge the potential of TGT 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 TGT 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.