In this article, we will look at the 10 Cheap Retail Stocks to Buy According to Analysts. Let’s look at where Dollar General Corporation (DG) 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
Dollar General Corporation (NYSE:DG)
Forward P/E: 14.83
Analyst Upside Potential as of September 23, 2024: 12.08%
Number of Hedge Fund Holders as of Q4 2024: 42
Dollar General (NYSE:DG) is a discount store retailer with more than 2,000 stores across Mexico and the US. It offers an array of merchandise in its stores, including home products, consumable items, seasonal items, and apparel. Its offerings include brands from manufacturers along with its private brand selections at discounted prices. Dollar General (NYSE:DG) is continuing the rural expansion of its operations, opening its 20,000th store in February.
The stock fell after it reported its earnings for the second quarter. Its revenue grew by 4% year-over-year to $10.2 billion, but earnings per share fell by 20% to $1.70, below analyst estimates of $1.79. However, Dollar General Corp (NYSE:DG) is here to stay. The company announced that its primary base of consumers were lower-income shoppers, and factors such as rising unemployment, inflation, and interest rates had put them in a worse position than they were six months ago. However, with inflation slowing down, the company is expected to recover.
Dollar General (NYSE:DG) holds a competitive advantage due to its highly discounted deals and prices, especially compared to its competitors, who do not hold such everyday low-price positions. It is continually strengthening its operations by focusing on a timely and accurate supply chain, customer-centric marketing, and in-store execution. It is also working towards its “back-to-basics” progress, enhancing customer experience by increasing employee presence at the front end of its stores and ensuring that its associates provide increased engagement to customers. In addition, the company is working to boost sales growth and improve in-stock levels by focusing labor hours on perpetual inventory management.
It is also closing the less efficient temporary facilities and has opened two new permanent distribution centers in Colorado and Arkansas. These centers are expected to reach the top of their speed in the coming months, significantly contributing to reduced transportation expenses and a reduction in stem miles. Dollar General is also undertaking the first full-scale refresh of its sorting process within its distribution centers. This will allow its store teams to manage shelves more efficiently, stock them quickly, and ensure greater on-shelf availability. All of this is ultimately expected to support ongoing sales growth and boost profitability.
Overall, DG ranks seventh among the 10 cheap retail stocks to buy according to analysts. While we acknowledge the potential of DG 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 DJ 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.