Best Retail Stocks to Buy for 2021

Real Money Pro columnist Paul Price tells what retailers to buy, and which to avoid, following the year of Covid-19.
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Fiscal 2020 was particularly nasty to most retailers due to the Covid-19 pandemic -- yet it provided a huge gain to a few lucky winners. 

Why was that? 

Government-imposed shutdowns deemed “non-essential” took away those firms’ ability to keep physical stores open. Those shutdowns began around March and lasted for a few months, depending on the rules implemented in various states. 

Even today, California and some other localities have re-imposed selective lockdowns. Paying rent, utilities, employee compensation and other expenses while generating no revenue from stores created immediate and substantial losses. 

While most facilities are now open, the deficits incurred during the fiscal first and second quarters obscured what those companies would have earned in 2020, barring virus-related events. 

That rendered 2020 price-to-earnings for firms who were hit by the shutdowns meaningless. 

Who benefited from Covid-19? 

It was mainly larger companies who were allowed to continuously operate, because they provided food and other "essential" goods. That included Walmart  (WMT) - Get Report, Costco (COST) - Get Report, Target  (TGT) - Get Report, all publicly traded grocery stores and their suppliers. Companies like Home Depot (HD) - Get Report and Lowe’s  (LOW) - Get Report also received passes from government regulators.

Not only did these stores stay open, in many areas they became the “only game in town.”

That dichotomy pushed many of the favored names into very pricey valuation territory, while absolutely gutting quotes for stocks of companies that were temporarily crippled by the shutdowns. 

Retail stocks hitting highs

Retail stocks hitting highs

All but one of these popular stocks trade for well above their typical multiples. Lowe’s, the lone exception, is doing so only because analysts think it will earn less in fiscal 2021 than it will this year. Yields are well below historically normal, as well. 

The big opportunities in this industry for 2021 require a focus on survivability, as judged by balance sheet debt and liquidity, plus forecasting what earnings per share are likely to be going forward. Many firms with high debt and fragile fundamentals have already declared bankruptcy. 

Retail bankruptcies in 2020

Retail bankruptcies in 2020

The seven retailers listed below are my top picks for the year ahead. All are expected to see enormous year-over-year profit improvement. Each of these stocks trade for bargain-basement multiples compared with their own normalized price-to-earnings. 

Bargain stocks in the retail sector

Bargain stocks in the retail sector

Caleres  (CAL) - Get Report never cut, or even trimmed, its dividend rate. Qurate Retail  (QRTEA) - Get Report has paid three special dividends, worth $4.50 per share, over the past five months. It’s likely that Designer Brands  (DBI) - Get Report, Cato Corp.  (CATO) - Get Report and Children's Place  (PLCE) - Get Report will reinstate cash payouts during 2021. 

The stocks on my list are primed to see higher earnings, positive dividend developments and P/E expansion in the year ahead. That’s a potent combination that could see some double or even triple from their current quotes. 

Every one of them has been there before. 

How important is multiple expansion while EPS are also growing? Tremendously.

A stock that increases earnings per share from $1 to $2 would double if its P/E remains stable. If it's multiple expands by 50%, though, from 10-times to 15-times, its stock would zoom from $10 to $30. 

The theme in retail for 2021 is anticipating the rebound of beaten-down names, while avoiding overpaying for shares that had everything go right in 2020, due to Covid-19.

Paul Price writes a daily column for Real Money Pro, TheStreet’s premium site for active traders. Click here to learn more and get great columns, commentary and trade ideas from Jim Cramer, Helene Meisler, Mark Sebastian, Paul Price, Doug Kass, and others.

At the time of publication, Price was long shares and short options on all seven of the “great bargain” list. He had no positions in any other stocks mentioned.