Nordstrom, Ross And TJX: The Best 3 Retail Stocks To Own Through February

Includes: JWN, ROST, TJX
by: Todd Campbell

Black Friday has come and gone and despite opening doors early, it seems retailers made little headway this season compared to last year. According to retail tracker ShopperTrak, sales at retail stores clocked in at $12.3 billion on Thanksgiving and Black Friday, just 2.4% above last year.

Despite the sluggish showing, which marked the smallest year-over-year gain since the recession, 140 million people still hit stores over the holiday weekend, according to the National Retail Federation.

Those visits will translate into billions in retailer profit, suggesting investors will need to be as selective as ever when it comes to picking the holiday winners and losers this year. If history is any gauge, three retailers that should be on your holiday shopping list this month are Nordstrom (NYSE:JWN), Ross Stores (ROST) and TJX Companies (NYSE:TJX).

The best retailers to own through the holidays

Despite the hit-and-miss nature of the holidays, Nordstrom, Ross Stores and TJX have a remarkable record of posting gains over the next three months, according to data from the Seasonal Investor database. Not only have all three finished February higher than they begin December in at least 9 of the past 10 years, but each is either lightly or uncorrelated to the S&P 500 during the period.

1. Nordstrom

The nationally known luxury retailer has a reputation for serving the well-heeled and that clientele helped support sales at its stores despite recessionary headwinds. As a result, shares in Nordstrom have marched higher in all 10 of the past 10 years, generating an impressive average and median return of 11.52% and 10.89%, respectively. The department store chain heads into the final quarter of the year following a tepid third quarter in which same store sales edged only slightly higher, gaining 0.1% from a year ago. However the small gain masks strong results in its direct-to-consumer business, which gained 23% in the quarter versus a year ago and strength in the company's emerging new off-price chain, Nordstrom Rack. And while same store sales were essentially flat, the company was able to hold the line on pricing despite a slip in units sold. That could suggest inventory is well aligned for the holiday push. Investors should also take note that Nordstrom's strong performance in the period has come with a lower standard deviation than the S&P 500. Returns have also been uncorrelated to the S&P 500, suggesting if the market's rally fades, shares in Nordstrom may still head higher.

Source: Seasonal Investor Database

2. Ross Stores

If you don't live by a Ross store, don't bother trying to shop them online because the off-price retailer has yet to bring its low price name brand strategy to the web. Instead it remains focused on driving inventory turns at its 1,133 stores. Ross sells clothing, footwear and home goods and while shoppers stayed away from Nordstrom last quarter, same store sales at Ross climbed 2%. That helped Ross' overall sales increase 6% to nearly $2.4 billion. Ross is returning some of that growth back to shareholders through both dividends and buybacks. The company repurchased $421 million worth of shares during the first nine months and plans to spend another $129 million this quarter. Despite lacking an online presence, shares in Ross have gained ground in all 10 of the past 10 years from December through February. During that period, Ross has returned an average and median 9.55% and 9%, respectively, while delivering a lower standard deviation than Nordstrom.

Source: Seasonal Investor Database

3. TJX Companies

Like Ross, TJX hasn't benefited from online retail's rapid sales growth. But that may be changing given the company has rolled out a new e-commerce site just in time for the holidays. The new site could help TJX drive sales higher given the average retailer with a web site generates roughly 11% of its total sales online, according to research firm Stern Agee. More importantly, online margins are considerably better than brick-and-mortar stores. While it remains to be seen if TJX will be successful in navigating the challenges of an ever evolving inventory online, the potential for the company to gain an edge over off-price competitors including Nordstrom's Rack and Ross Stores is big. But even without the help of online sales, TJX appears to be doing fine. The company notched an impressive 5% lift in same store sales during Q3, better than both these other two retailers. That drove the company to boost its guidance for the full year to earnings per share of $2.91-$2.94. Over the past decade, investors have been rewarded 9 times, with shares producing an average and median 6.49% and 6.06% return in the 3-months ending February.

Source: Seasonal Investor Database

Some final thoughts

Over the past 15 years on the sell-side, I've discovered using a system to rank companies can help narrow a large universe of companies down to an actionable few. So, my team screens the most widely traded equities every week, giving each a score based on the company's earnings beats, earnings growth, insider buying, money flow, short interest, valuation and seasonality.

Across those inputs, our system favors TJX, giving it a score of 75. This suggests TJX may offer investors a better balance of earnings and valuation than Nordstrom and Ross Stores. Regardless, all three have exceptional seasonal tailwinds worthy of investor attention.

Source: E.B. Capital Markets, LLC

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TJX, JWN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.