5 Gifts for the Holidays

Halloween might be the holiday on everyone's mind today, but at the flip of the calendar page on Thursday, all attention will be on Christmas. As we approach the gift-giving season, November and December are typically the most profitable months for retailers. So what better time than now to forecast which big retail stocks will ring in the new year with a smile -- or expect a late-season visit from the Grinch?

Historically, the companies on my list command a large share of the holiday business. The first hurdle is third-quarter earnings releases, which we will see in droves by mid-November. The second hurdle is whether these stocks appear to have a great, average, or subpar holiday season built into their current prices.

Here is what the Street expects from these companies in the third quarter:

Consensus Estimates

EPS VS LY

 EPS Growth Over Past Year

Wal-Mart (NYSE:WMT)

$0.67

8.1%

 7.4%

Target (NYSE:TGT)

$0.63

6.8%

 19.1%

Costco (NASDAQ:COST)

$0.58

13.7%

 2.9%

Best Buy (NYSE:BBY)

$0.41

32.3%

 12.4%

Bed Bath & Beyond (NASDAQ:BBBY)

$0.52

4.0%

 8.1%
Analyst estimates from Reuters; earnings-per-share growth data from Capital IQ.

Living better during the holidays?
Wal-Mart has been through more than its share of ups and downs (mostly downs) this year. Comparable-store sales grew a little over last year, helped by stronger performance from the Sam's Club division.

Last week, the company confronted the analysts at its headquarters in Bentonville, Ark., but the Wall Street types walked away highly unimpressed. These fall analyst conferences are usually worth a bump in the stock price of about a buck, but this year, the stock is still sitting lower than it was prior to the conference.

Our Inside Value team has found value in this stock at 15 times trailing earnings. While I don't see much risk at the current price level of $45, I also don't see a lot of upside. It will be interesting to see whether the company's new "Save Money, Live Better" slogan and slash-and-burn pricing strategy will be effective. I'm sure they'll please customers, but I can't help but wonder what the effect on margins will be after cutting the prices of 15,000 items.

Can Target target holiday shoppers?
Results at Target continue to impress, with last-quarter comp sales growth of 5%. Discount-store shoppers are finding the low prices and upscale mix of merchandise irresistible. Deemed the best retail stock for 2007, Target has delivered solid double-digit earnings growth, though it's beating the S&P 500 by only a hair year-to-date. 

The wild card with Target is future prospects for the credit-card business. Some shareholders are pushing Target to sell the business segment, which could affect the stock price. At current prices in the low $60s, I find the shares attractive. 

Bulk holiday joy
Longtime readers of my articles know I consider Costco the best retailer on the planet -- for an in-depth discussion, check out my bullish case from last June. Since then, the stock has soared more than 25%. Its most recent quarter may have looked mediocre, with a mere 4.7% increase in earnings, but the results were held back by one-time charges reflecting changes in sales return reserves and membership income recognition. Excluding these charges, EPS for the past two quarters would have jumped 15%.

While I love the management and business model of Costco, its current price -- at 27 times trailing earnings -- isn't a screaming buy. However, I'm always ready to accumulate shares on any pullback the stock experiences. Perhaps a dismal holiday season that sours investors on all retail stocks is the next potential opportunity to buy into this outstanding company.

Lit-up expectations
I love to shop at Best Buy stores, but I'm cautious about holding the stock during this holiday season. Don't get me wrong, the stores will be packed. Consumer electronics are on everyone's list, whether to give or to receive, and if any retailer has mastered this product segment, it's Best Buy.

However, I am concerned with the expectations that are built into the price. Wall Street's current consensus calls for 32% growth this quarter over last year's third-quarter earnings per share. That's a tall order, presumably already priced into the stock, considering many are worried that the holiday season may be a bit slower this year. Additionally, competition could be heating up in the electronics department, as Wal-Mart is now selling both Apple (Nasdaq: AAPL  ) and Dell (Nasdaq: DELL  ) products.

Deck the halls with Bed Bath & Beyond
My under-the-radar retail pick for the holidays is Bed Bath & Beyond. This company has not been "feeling the love" from Wall Street during 2007, for reasons that are easy to understand. After 15 years of incredibly consistent growth, Bed Bath has cratered this year. Comp sales are up by the low single digits, earnings have only grown 8% over the past 12 months, and the multiple has been shrinking like a cotton T-shirt left in the dryer for way too long. 

The good news is that Wall Street now expects lukewarm growth at Bed Bath: EPS growth of just 4% in the current quarter and a flat fourth quarter. This company is too well-run to stay down much longer, and I like its prospects for the holidays. The stores are an easy shop -- you don't have to park an acre away from the door, and they offer great holiday decoration merchandise and unique gift ideas. Overall, the products are high quality at reasonable prices, just what shoppers are looking for during the holidays.

'Tis the season to spend money. So while you're doing your holiday shopping, keep an eye on which retailers seem to be bustling. Crowded stores may be frustrating, but at least you'll have an idea which companies will be unwrapping holiday cheer when they report next year.

For more retail holiday picks, check out:


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