Best Retail Stocks: Is Now the Time to Buy?
The stock market has not had a great year in 2022. First growth stocks lead the decline early on mainly because of rising interest rates in the U.S. For instance, the Vanguard Growth Index Fund ETF (NYSE: VUG) is down nearly 30% this year. More recently, retail stocks have fallen mainly because of decades-high inflation. Opportunistic investors are on the lookout for the best retail stocks that could recover.
The SPDR S&P Retail ETF (NYSE: XRT) tracks retail stocks in the S&P TMI. It’s down over 33% this year. Over the last month, it’s down over 17%, meaning that around half of the ETFs decline has come recently. This is because some big retail stocks have said that their first-quarter results have been poor.
Some of the companies whose stock has fallen this year are stocks of good companies. That could mean that a recovery in those stocks could be great for investors in the long run. Before diving into retail stocks, it’s vital to know why they’re down.
Why are Retail Stocks Down?
For several months inflation in the U.S. has been higher than in about 40 years! High inflation hurts not only folks in the U.S. but also U.S. companies. Inflation means higher costs. When costs for retail stocks are high, it hurts profits.
We can trace much of the inflation in the US back to the COVID-19 pandemic. Many times, retail products are made outside the U.S. In many of these countries, COVID-19-related lockdowns kept employees from working to make the products sold in the U.S.
On the other hand, stimulus money during COVID-19 and savings from not traveling, dining out, or seeing a movie in the theater meant that demand for retail products was high. Since U.S. consumers were buying products and production was low, inflation rose.
To make matters worse, many workers who drive delivery trucks and ship products could not work. That means that retail items are harder to ship, and shipping costs have also been high.
Rising costs of production and shipping have started to catch up to retail stocks. That means that profits for retail companies around the U.S. have fallen. Therefore, investors fear that things may worsen and have sold off retail stocks this year.
At the same time, investors hoping for a recovery may be interested in buying the best retail stocks.
Best Retail Stocks to Buy
Some of the biggest retail stocks in the U.S. have fallen this month after saying that their first-quarter financial results were hurt by inflation. In addition to high inflation, many retail stocks had great financial results in 2021 and 2020.
Often investors buy stocks hoping that the companies can increase sales and profits every year. After such good years, it has been hard for retail stocks to grow in 2022. If you believe inflation will cool this year and 2023 will look much brighter for retail stocks, now might be a great time to buy retail stocks.
Let’s look at a couple of the retail stocks that have been hit this month.
Walmart (NYSE: WMT)
Walmart is one of the largest retail companies in the world. On May 17, Walmart put out a press release saying that adjusted earnings per share for the first quarter of 2022 was $1.30. Industry analysts thought Walmart would earn $1.40 per share. The press release also said they think supply chain costs and inflation would continue to be high for the rest of the year.
Target (NYSE: TGT)
Target is a competitor of Walmart and one of the biggest retail companies in the U.S. For the first quarter of 2022, industry analysts thought Target would make $3 in adjusted earnings per share. The company said they only made $2.19. Target said that higher shipping costs hurt the results.
Invest in Retail Stock Now or Wait?
Another reason that inflation is high is the conflict between Russia and Ukraine. In response, many countries across the globe have begun to reduce their purchases of oil and natural gas from Russia. Since Russia is one of the world’s biggest suppliers of oil and natural gas, there has been a huge rise in the price of these commodities.
Oil is used to make the gas we use to drive our cars. We also use natural gas to heat our homes. Rising oil and natural gas prices hit almost everyone. Since we need gas to go to work and heat our homes, that could mean that folks have less money to spend on retail items.
If you think these issues will pass soon, it might be a great time to invest in retail stocks. If you think things will get worse, it might be better to pass for now.
Another way to look at retail stocks is to value the stocks. For instance, Walmart has a P/E ratio of about 25x. The lower the P/E ratio, the better value the stock offers. Walmart’s P/E has come down, but it is still above its lowest level in five years. Same with Target. Its P/E ratio is about 13x, still above its lowest point in the last five years.
After Walmart and Target stocks did so well in 2020 and 2021, the two stocks fall in 2022 still may not offer the best valuation that they have over the last five years. Considering the issues with the supply chain issues and inflation that we have now, the stocks likely have more risk than they have had over that period.
About BJ Cook
BJ Cook is a long-time stock nerd. He has held several roles in the equity research world and earned the right to use the CFA designation in 2014. When he’s not writing for Investment U, you can find him searching for new investment ideas. Outside the investment community, BJ is a die-hard Cubs fan.