This year's market volatility is taking the swagger out of equities, but consumer stocks are outperforming the broader markets to date.
The S&P 500 Consumer Discretionary Index is down 5.9% this year, as of this writing. Consumer staples stocks within the S&P 500 are relatively flat for the year. Both sectors are performing better than the S&P 500, which is down 6.3%, at a recent check.
Deutsche Bank is bullish on three specific retail stocks.
"Thematically, the low-end is working in this volatile backdrop, with Walmart and the dollar stores consistently in the green of late," Deutsche Bank analyst Paul Trussell wrote in a note to clients on Tuesday. "We acknowledge the 'improved prospects' of their core customer, but remain selective at current valuations. Instead, our best ideas are proven winners in their sector, each outperforming peers on the top-line. We argue that these trends are sustainable and underappreciated at current multiples, especially with catalysts ahead."
Check out the list of Deutsche Bank's favored retail stocks. We've paired the company with commentary from Jim Cramer, if the stock is owned by his Action Alerts PLUS Charitable Trust Portfolio.
Industry: Consumer Goods & Services/Apparel Retail
Year-to-date return: %
Foot Locker, Inc. operates as an athletic shoes and apparel retailer. The company operates in two segments, Athletic Stores and Direct-to-Customers.
Deutsche Bank's Target Price: $81
Deutsche Bank Said: FL is a top pick for 2016 based on: 1) the strong athletic footwear trends that continue to benefit FL domestically and internationally; 2) meaningful margin upside opportunities; and 3) compelling valuation in relation to peers such as NKE and LB. FL is beat-and-raise story, topping EPS expectations for the past nine consecutive quarters with strong top and bottom line results, which we expect to continue for 4Q15 and FY16.
The major risk to FL has been and continues to be an eventual top-line slowdown as the consumer appetite for athletic footwear could shift, vendors could sell more product through their direct arm, and ASPs [average selling prices] on average are moving lower (therefore creating a need to sell more units). We believe this risk has been and continues to be mitigated by the company's unique and exclusive partnership with NKE/UA & others who are focused on driving robust demand for many years to come; FL's growing kids, women's and International business; as well as its proactive approach to the mall (closed 1,000 doors over the last decade). FL is a winner worth sticking with, in our view.
Industry: Consumer Goods & Services/Department Stores
Year-to-date return: %
J.C. Penney Company, Inc., through its subsidiary, J. C. Penney Corporation, Inc., sells merchandise through department stores in the United States.
Deutsche Bank's Target Price: $12
Deutsche Bank Said: We choose JCP as one of our top picks for 2016 based on: 1) market share momentum; 2) many levers available to expand margins; and 3) an upcoming balance sheet catalyst. JCP continues to separate itself from peers as a self-help story with each line item in the P&L improving of late, and therefore we believe it should see its valuation gap to our $12 PT close as investors gain confidence in the company's $1.2B EBITDA goal (we are modeling $1.2B vs. the Street at $1.08B).
While we acknowledge that the company is vulnerable to weak mall traffic and a high level of promotions within the struggling apparel category from peers, we believe JCP showcased in 4Q that it is able to overcome these concerns and still produce improving free cash flow. Combined with further debt restructuring/refinancing, we believe this market share gaining story will be a stock market winner as well.
Industry: Consumer Non-Discretionary/Hypermarkets & Super Centers
Year-to-date return: %
Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories.
Deutsche Bank's Target Price: $198
Deutsche Bank Said: After outperforming last year, COST's stock momentum has reversed of late, but still remains one of our top picks for 2016 based on: 1) revenue growth drivers (e.g. organic and fresh foods and higher gas gallons); 2) margin expansion opportunities (e.g. increasing penetration of private label and organic food and international mix shift); and 3) a number of catalysts ahead including the transition to Visa, lapping IT modernization, and the eventual MFI increase.
Specifically, COST is trading down ~11% off of the stock's 52-week high, underperforming its staple peers of late on concerns top-line trends could slow given tough compares and high-end weakness. We disagree and point to the company's strong traffic throughout 2008 as well as its recent performance despite low gas prices. We see multiple years of double-digit earnings growth ahead combining with the company's Amazon proof model (consistent traffic, two-thirds consumables, & ~90% membership renewal rate).
"We like Costco for its ability to drive sales and visibility into earnings, which, combined with a variety of catalysts to look forward to this year, creates a compelling story, especially with shares trading below our cost basis," Cramer wrote in the most recent weekly roundup.
"Catalysts include revenue and margin benefits from the transition to Visa from American Express, a potential earnings-growth inflection starting in the back half of the year, and pricing dominance (with two-thirds of operating income coming from recurring membership fees). Given the scarcity of growth COST offers, coupled with high earnings visibility (further enhanced following the company's strong December sales results, reported this month), we view shares as attractive and maintain our $170 long-term price target," he said.
Costco reports its January sales numbers on Feb. 3, which could be pressured from the recent East Coast winter storm as well as a shift in Super Bowl timing. Still "any weakness would provide opportunity for long-term investors," added Jack Mohr, research director of Action Alerts PLUS.
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