We recently published a list of the 12 Cheap Retail Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where The Gap Inc. (NYSE:GAP) stands against other cheap retail stocks to buy right now.
Will Trump’s Tariffs Impact Retail Stocks?
The Trump administration proposed 25% tariffs on goods imported from Canada and Mexico and 10% tariffs on Chinese-imported goods. Analysts believe these tariffs will affect retail stocks and the goods manufactured in the tariffed countries, at least theoretically. While tariffs on Mexico and Canada have been delayed, they have kicked in for China, according to Yahoo! Finance. This has led to several retailers moving sourcing out of China to contain costs.
Simeon Siegel, retail analyst at BMO Capital Markets, appeared in an episode of Yahoo! Finance’s Opening Bid podcast. Talking about the potential effect of Trump’s tariffs on retail stocks, he was of the opinion that we are focusing on tariffs more than is required. Taking a purely business perspective, he reasoned that a tariff is nothing more than a cost input going up, quite like how the cost of cotton, shipping, or labor can rise.
When such cases materialize, companies take steps to deal with the rising costs, but they don’t become all-encompassed by them. Siegel posited that the uncertainty surrounding this scenario is dramatically more concerning than the actual severity. Approaching the situation as an analyst, he said that he is focusing on companies with the pricing power and capability to deal with rising costs, regardless of why the costs are increasing. Healthy brands with healthy businesses are thus the way to approach this conversation.
Big Tech’s Massive CapEx Plans: Will They Affect Retailers?
Big Tech’s massive capex plans dictate the potential spending of a cumulative $325 billion in capital expenditures and investments in 2025, primarily due to a strong commitment to building AI infrastructure. While it does not seem evident, Morgan Stanley is of the opinion that retail stocks might be the overlooked winners of these significant AI investment plans. AI “hyperscalers” are invested in a spending race, which might prove to be a tailwind hidden in plain sight for the retail sector, which is already evolving due to the technological leap surrounding AI, automation, and data.
Equity analyst Simeon Gutman said that while retailers may not be as invested in pursuing AI infrastructure investments as tech companies, “the tech capex boom suggests retailers are on the verge of and should benefit from a technology inflection.” The announced $325 billion may not be an initiative taken to directly impact the retail sector, but Morgan Stanley predicts that it may result in a capex boost amidst retailers in a position to afford it. The boom may present big-box retailers with significant investing opportunities to improve and augment automation, in-store experiences, and advertising. Consequently, market share gains may materialize for retailers in the best position to invest.
Our Methodology
We sifted through stock screeners, online rankings, and ETFs to compile a list of 30 retail stocks. We checked their forward P/E ratios (less than 15) and then selected the top 12 most popular stocks among elite hedge funds as of Q3 2024. We sourced the hedge fund sentiment data from Insider Monkey’s database. The list is sorted in ascending order of hedge fund sentiment. Please note that the forward P/E ratios are as of February 11, 2025.
Why do we care about what hedge funds do? 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).
Photo by Ian Deng Quddu on Unsplash
The Gap Inc. (NYSE:GAP)
Forward P/E: 11.15
Number of Hedge Fund Holders: 39
The Gap, Inc. (NYSE:GAP) is a specialty retailer in the US that offers apparel, accessories, and personal care products for women, men, and children. Its brand portfolio includes Old Navy, Gap, Banana Republic, and Athleta brands. The company reported net sales of $3.8 billion in fiscal Q3 2024, reflecting a 2% year-over-year growth. Its gross margin expanded 140 basis points, delivering an operating income of $355 million and an operating margin of 9.3%, an increase of 270 basis points versus last year.
On January 27, The Gap, Inc. (NYSE:GAP) announced an expanded partnership with Sean Wotherspoon, its global vintage curator, to release GapVintage and bring the company’s iconic product archive directly to customers across the globe. The company will include seasonal and themed drops, taking control of its vintage products as the secondhand market continues to grow and resonate among younger generations.
The company has a forward P/E of 11.15, and is trading at a 34.11% discount to its sector. Its median price target of $22.32 implies an upside of 34.41% from current levels.
Overall, GAP ranks seventh on our list of cheap retail stocks to buy according to hedge funds. While we acknowledge the potential of GAP, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than GAP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap
Disclosure: None. This article is originally published at Insider Monkey.
