According to Mastercard SpendingPulse, the retail industry just capped its strongest holiday-season growth in six years. But not all retail stocks are equal. So, how can investors best put their cash to work in the new year?
We asked three top Motley Fool contributors to each choose a retail stock they think you would be wise to buy in January. Read on to learn why they like Retail Opportunity Investments (ROIC -1.45%), Conn's (CONN -1.83%), and Target (TGT -0.45%).
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Collect a 4.6% dividend while you wait
Steve Symington (Retail Opportunity Investments): Retail Opportunity Investments is a real estate investment trust (REIT) that focuses on buying and revitalizing necessity-based retail properties -- which usually means they're anchored by a large grocery chain, which helps drive traffic to other tenants -- in mid- to high-income areas along the West Coast. The company's methodical acquisition strategy makes it a fantastic way to play the retail segment without the risk you might otherwise take on by betting on the success of any one brand.
Still, Retail Opportunity Investments' acquisitions have effectively slowed to a crawl in recent quarters amid unfavorable real estate market conditions and rising interest rates. In the meantime, though, the company is focusing on improving the financial performance of its existing portfolio; last quarter, the company managed to achieve a record portfolio lease rate of 97.8%, raised base rents by 7%, increased same-center net operating income by 2.5%, and meaningfully reduced its debt.
And of course, management has pledged to remain "cautious and patient" with acquisitions as they wait for markets to turn in their favor. In the meantime, patient investors can collect a juicy 4.6% annual yield on their money.
Check out the latest Retail Opportunity Investments earnings call transcript.
High growth and low share prices -- what's not to love?
Anders Bylund (Conn's): The electronics and furniture retailer is growing its store network at a blistering pace. The company opened six new locations in 2018, it plans to introduce another seven this year, and it looks forward to opening at least 12 new stores in 2020. The resulting slate of 131 stores or more represents a 24% increase in three short years.
It's a capital-intensive strategy for sure, and many investors won't touch a company in the midst of such a large and expensive growth program. But with many stores come greater revenue intakes, and Conn's is also refocusing its product portfolio on larger TV screens and smart-home tools. That may not be a particularly bold strategy these days, since everything you buy seems to come with just a touch of artificial intelligence and data collection, but it's absolutely the right way forward. Conn's is doing its best to stay relevant in a rapidly changing consumer market.
Conn's share prices fell 48% lower over the last six months, including a 40% drop in the last quarter alone. At the same time, the company consistently beat Wall Street's earnings expectations. The stock is now trading at bargain-bin valuations like 10 times trailing earnings, or 5 times free cash flows. Paired with the company's high-octane growth ambitions -- annual sales rose 16% per year in the last half-decade, and management seems intent on pushing the pedal to the metal -- you get an intriguing growth stock at a very reasonable price.
Check out the latest Conn's earnings call transcript.
Don't let Target's recent drop scare you
Chris Neiger (Target): Retail stock investors may be skittish about diving into Target right now after the company's stock slid 17% over the past three months. Investors were disappointed that Target's margins slipped slightly in the quarter, but avoiding this retail giant based on Wall Street's fickleness could be a huge mistake.
For starters, Target's third quarter was actually pretty good. The company's e-commerce sales grew by an impressive 49% year over year in the quarter, and the company's comparable sales and traffic jumped by more than 5% year over year. Additionally, adjusted earnings per share popped by 20% to $1.09 in the third quarter, and the company raised its dividend once again, marking 47 consecutive years of consecutive dividend increases.
Investors should take note of Target's moves to take on its biggest rival, Amazon. Target bought same-day delivery service company Shipt at the end of 2017 to boost its grocery delivery business, which is now available in 250 markets. And reports have surfaced that Target will bring more products under the Shipt delivery service, which would essentially create a competitor to Amazon's Prime service.
If all of that weren't enough, the recent stock price pullback means Target's shares are trading at just 12.5 times the company's forward earnings. With Target's strong e-commerce growth and big plans to expand its online business likely ahead, investors should see the company's success for what it is: a growing opportunity in the e-commerce market.
Check out the latest Target earnings call transcript.
The bottom line
In today's volatile market, we certainly can't guarantee that these three companies will go on to deliver outsized returns. But between Retail Opportunity Investments' disciplined approach and healthy dividend, Conn's beaten-down stock and ambitious expansion plans, and Target's long history of capital returns and strong online growth, these contributors believe chances are high that they'll do exactly that.
