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3 Top Retail Stocks to Buy Right Now

By Jeremy Bowman, Steve Symington, and Leo Sun - May 18, 2018 at 6:01PM

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Retail stocks are heating up. Here's how to play the once-forgotten sector.

Retail stocks are suddenly in vogue. At this time last year, investors were talking about the "retail apocalypse," as 2017 saw a record number of store closures, but following a strong holiday season, retail stocks have been surging. Like cream, the good ones have been rising to the top. 

Over the last six months, the SPDR S&P Retail ETF (XRT 1.95%) is up 18%, compared with just a 6% gain for the S&P 500. With the economy running at full strength and a strong first-quarter earnings report from Macy's to kick off earnings season, investors are feeling a renewed sense of optimism about the sector. Keep reading to see why our Fool.com contributors recommend looking at Ulta Beauty (ULTA 2.24%), Retail Opportunity Investments Corp (ROIC 1.41%), and Walmart (WMT 0.96%) to take advantage of the sector bullishness.

Dozens of people move up and down escalators inside a mall.

Image source: Getty Images.

A growing cosmetics retailer

Leo Sun (Ulta Beauty): Ulta Beauty, which sells cosmetic products and uses in-store salons to generate foot traffic at its stores, opened 100 new stores in 2017 and finished the year with 1,074 locations. It plans to open another 100 stores this year.

Ulta Beauty is confidently expanding because it consistently grows its comparable-store sales, revenue, and earnings at impressive rates. The retailer's comps rose 11% last year as its revenue and adjusted diluted EPS grew 21% and 25%, respectively. Those are solid growth rates for a stock that trades at 24 times this year's earnings.

However, two factors caused Ulta's shares to slide 14% over the past 12 months. First, Ulta expects just 6% to 8% comps growth this year, with revenue growth in the "low teens." This indicates that Ulta could rely more on new store openings than comps growth to fuel its revenue expansion.

Second, some investors fear that Sephora's advance into J.C. Penney stores, Amazon's partnerships with high-end beauty brands, and other headwinds could diminish Ulta's leadership.

Those concerns are valid, but Ulta's comps growth remains impressive for a 28-year-old retailer, and its unique combination of stores with salons should hold its rivals at bay. The company also has $397.4 million in cash, cash equivalents, and short-term investments to fall back on, as well as a clean balance sheet. With a strong track record and solid financials, I think Ulta still has room to run.

Thinking outside the (retail) box

Steve Symington (Retail Opportunity Investments): While many investors grapple with uncertainty surrounding the state of the retail industry, Retail Opportunity Investments has been busy carving out its own sustainable niche. This real estate investment trust (REIT) focuses on buying and revitalizing grocery-anchored retail properties in mid- to high-income areas in the Western United States. Their necessity-based nature means those properties have proven largely immune to broader retail-industry struggles, enabling the company to maintain healthy lease rates (above 97% for the past 15 quarters), and giving it pricing power for base rents (up 21.6% and 8.3% on new and renewed leases last quarter, respectively).

Perhaps best of all for prospective buyers of the stock, Retail Opportunity Investments has pulled back around 13% over the past year even as the company continues to steadily build its portfolio and demonstrate its relative strength. With shares now trading at a reasonable 14.5 times this year's expected funds from operations, and with a dividend yielding around 4.6% annually as of this writing, I think Retail Opportunity Investments is easily one of the market's most promising retail stocks today.

Bigger is better

Jeremy Bowman (Walmart): For years, Walmart reigned supreme over the American retail landscape as its superstores blanketed the heartland and its rock-bottom prices drew hordes of shoppers. However, with the rise of e-commerce, Walmart has been forced to adapt. The company has essentially stopped opening new stores, and instead invested in its current store base, raised wages, and improved training for new employees. Walmart has also focused on e-commerce, adding over 1,000 online grocery pickup locations, and acquiring Jet.com for $3.3 billion, along with smaller online native brands. 

Those moves have paid off. Walmart has now reported 14 straight quarters of comparable-sales growth, and its two-year comps jumped 4.4% in the fourth quarter, its fastest clip in eight years. U.S. e-commerce sales surged 44% last year, and profits are also expected to return to growth this year as the investments in recent years begin to pay off on the bottom line.

While it sounds like Walmart is firing on all cylinders, investors seem to have a different opinion.The stock is down 22% from its January high, selling off following disappointing e-commerce growth in the company's fourth-quarter report, and falling again after the market pooh-poohed its $16 billion acquisition of a majority stake in Flipkart, the Indian e-commerce specialist. The investor response to both news items seems misguided. Walmart still expects U.S. e-commerce growth of 40% this year, indicating that the fourth-quarter increase of 23% was probably just a blip. Furthermore, the Flipkart deal should pay off in the long run, as the Indian e-commerce market is expected to explode over time, reaching $200 billion by 2026.

Walmart still has many of the advantages it always had, including economies of scale and stores within 10 miles of 90% of the U.S. population, giving it a boost in e-commerce. As it adapts to the changing retail landscape, the company should remain among the industry's leaders.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of JCP. Leo Sun owns shares of AMZN. Steve Symington owns shares of Retail Opportunity Investments. The Motley Fool owns shares of and recommends AMZN and Retail Opportunity Investments. The Motley Fool recommends Ulta Beauty. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$129.82 (0.96%) $1.24
Retail Opportunity Investments Corp. Stock Quote
Retail Opportunity Investments Corp.
ROIC
$17.96 (1.41%) $0.25
Ulta Beauty, Inc. Stock Quote
Ulta Beauty, Inc.
ULTA
$390.03 (2.24%) $8.55
SPDR Series Trust - SPDR S&P Retail ETF Stock Quote
SPDR Series Trust - SPDR S&P Retail ETF
XRT
$70.23 (1.95%) $1.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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