Being less than a month away from the biggest shopping surge of the year, now is a good time to make some speculative bets on the retail industry. In this article, I explain why Macy's and Wal-Mart are good long bets, while Best Buy and J.C. Penney look like good stocks to stay away from.
Macy's (M) - Strong Buy
When it comes to the holiday season, Macy's is one of the first companies that comes to mind. It has a unique opportunity to promote its brand during the Macy's Thanksgiving Day Parade and continues to grow profitability in a department store industry that has struggled mightily over the past few years. After an earnings hiccup in 2009, Macy's appears to be on the right track as it has brought its quarterly dividend from 5 cents back up to an all time high of 20 cents. At around $38, Macy's is a very cheap stock right now as earnings per share are expected to eclipse the $3.80 mark in early 2014 with expected earnings growth over the next 5 years beating the market average by about 3% per annum. With all of these factors in mind, Macy's appears to be a strong buy.
Wal-Mart (WMT) - Buy
I recently put a hold recommendation on Wal-Mart, but after looking at its holiday season strategy and looking at the technicals, I believe there is still some room for growth during and after the holiday season. Wal-Mart is heavily advertising the return of its once popular layaway program, which is a great strategy considering the recent success of rent-to-own electronics retailers like Rent-A-Center (RCII) and CONN's (CONN) in relation to struggling electronics retailers like Best Buy. In addition, Wal-Mart is not as dependent on its holiday sales as many other retailers. In its last fiscal year, about $123 billion of its $447 billion (27.5%) in revenue and $5.16 billion of its $16.39 billion (31.5%) in earnings came in its fiscal fourth quarter. If the holiday season is a bust, Wal-Mart will not be affected that badly, while a strong holiday season will have a similar effect on Wal-Mart as it would have on other retailers who expect 30% to 40% of revenues from the holiday season. Right now, I put a buy recommendation on Wal-Mart and expect strong growth over the next few months followed by much slower growth which will nevertheless balance out a portfolio.
Best Buy (BBY) - Sell
As everyone who follows the stock knows, Best Buy shares have been in free fall over the past two years. After a promise of a buyout from the founder boosted Best Buy shares, the company is back to trading around its 52 week low as I predicted they would here (except shares dropped lower than I expected). I'm here to say that this holiday season will bring much of the same story. Last year, Best Buy failed to fill orders in time for Christmas when the company promised on time delivery. Customers will remember this for the 2012 holiday season and take their business elsewhere to the likes of Amazon (AMZN), Wal-Mart, and others. Electronics companies have several channels of distribution and when one of those channels, in this case Best Buy, fails its customers, they will go to another channel for an identical product at the exact same (or lower) price. Analysts expect Best Buy's quarter four earnings per share to drop to $1.77 from last year's mark of $2.47. I believe this is an ambitious number and believe that Best Buy may struggle to be profitable at all by the holiday season of 2014. This makes me very bearish on Best Buy.
J.C. Penney (JCP) - Strong Sell
I'm a big believer in the power of good management and a big believer in current and former Apple executives. When Ron Johnson, former Senior Vice President of retail operations for Apple, became CEO of J.C. Penney and announced a giant company overhaul, I (along with several Wall Street analysts) was very excited about the news. After seeing Mr. Johnson as CEO for one year, I believe his plan to implement flat pricing and several sub-stores throughout its department stores may in fact lead to the death of J.C. Penney as we know it. The company has had four straight quarters of negative net income and the implementation of its new plan has done nothing but disappoint. Shares are down over 25% in the last year and are down 44.4% since Ron Johnson announced his plan. Analysts expect J.C. Penney to turn things around this holiday season, but if the company fails to do this, we could see a 20% to 30% haircut on the stock in the early months of 2013. Right now, I put a strong sell recommendation on J.C. Penney and believe at-the-money February puts may be a good investment choice right now.