The stock market isn't having a very jolly holiday season. Stocks have been volatile since the beginning of October, and as of this writing, the S&P 500 is more than 10% off its recent high. Some high-flying stocks have been hit even harder, delivering a lump of coal to investors who paid too lofty a premium for growth.
Every market sell-off creates opportunities, and this one is no different. Two retailers, Best Buy (BBY -1.70%) and Target (TGT -4.02%), should pique your interest if you're on the hunt for beaten-down stocks.
Holding its own
Consumer electronics retailer Best Buy could have followed former rival Circuit City into the grave, but the company avoided that fate by leveraging its key advantage over online retailers. Over the past six years, Best Buy under CEO Hubert Joly has slashed costs, lowered prices, and built out its online business. But the most important move was to invest in customer service.
You can easily buy a TV, laptop, or security camera online. But for the swath of U.S. consumers who aren't particularly tech-savvy -- those who don't know how to set up a home Wi-Fi network, or have no idea how much RAM they really need (or what RAM is) -- in-person customer service has value. That's Best Buy's bread and butter, and it's something that online retailers can't easily provide.
The strategy has worked like a charm. Best Buy's sales and profits are booming, despite intense competition from big-box stores and Amazon.com. The company expects comparable sales to grow by 4% to 5% this year, with adjusted earnings per share set to rise by as much as 17%. Earnings growth may not remain that quick in the coming years, given that Best Buy can only become so efficient. But a renewed focus on services should help keep the bottom line growing.
With Best Buy expecting adjusted EPS as high as $5.19 this year, the stock trades for around 11.5 times earnings. Shares have tumbled nearly 30% since topping out earlier this year. The stock could very well keep heading lower, given trade tensions and other things out of the company's control. But for patient investors, Best Buy is one to watch.
An online contender
Target is another retail stock that's been hammered by a rough stock market. Shares have lost about 22% over the past month alone, partly because of the stock market sell-off, and partly because of a somewhat disappointing quarterly report.
Target's third quarter was mostly fine. The company missed analyst estimates for both revenue and earnings, but comps growth remained strong, and online sales growth accelerated. Comps were up 5.1%, driven by 5.3% traffic growth and 49% e-commerce growth. Target's free two-day shipping initiative launched earlier this year has helped boost online sales.
The company's earnings grew, but only because of lower interest and tax expenses. Its operating margin slumped 40 basis points year over year to 4.6%, reflecting the company's investments in e-commerce, higher costs related to wages and training, and more-competitive pricing.
This bottom-line pressure may be what spooked the market, but investors should focus on the long term. Target is becoming a legitimate alternative to Amazon, albeit with a much smaller selection. At the same time, its stores are drawing traffic as many other retailers are struggling to attract shoppers. What matters is what Target looks like 10 years from now, not 6 months from now.
Target stock isn't quite as cheap as Best Buy, trading for 12.5 times the midpoint of the retailer's full-year adjusted earnings guidance. Earnings growth may be tough to achieve in the near term, given the lapping of corporate tax cuts and the margin pressure from the growing online business. But Target is doing everything right, and that should pay off for investors down the road.