2019 might be remembered as the year that marked the return of retail stocks. After many investors abandoned the sector in favor of e-commerce specialists, companies like Target (TGT +1.27%) and Costco (COST +0.82%) soared past the tech-heavy Nasdaq index and produced notable returns. Even stodgy Walmart (WMT +0.75%) outperformed the Nasdaq after accounting for dividends.
The top retail stocks have earned their way back into Wall Street's good graces, though, thanks to some attractive trends that appear set to continue into 2020. Let's look at why this niche might deserve more of your investing dollars in the year ahead.
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Multichannel is better
If investors were worried that e-commerce specialists would use their pricing advantage to decimate established retailers, 2019 proved that fear to be overblown. Instead of choosing online shopping exclusively, consumers demonstrated last year that they prefer to do a mix of in-store and at-home purchasing rather than simply screening for products based solely on price.
The best retailers identified that trend early on and have poured cash into making their existing store networks operate as online fulfillment centers, too. Billions went toward upgrades and remodels as well, in hopes of lifting the in-person shopping experience.
This shift allowed Target and Walmart to post their best customer traffic numbers in a decade, with online sales driving traffic to the stores and the store base helping deliver ultra-fast shipping to those who chose to shop online. That's a recipe for a delighted customer, and the new multichannel strategy should ensure that names like Target and Home Depot (HD +0.63%) remain industry staples even as e-commerce grows toward 50% or more of a retailer's annual revenue.
Profits are rising
While multichannel retailing has helped spur faster growth, it also implies higher profitability ahead for many top stocks in the industry. Consumers are paying up for the convenience of quick fulfillment like same-day delivery or in-store pickup. As a result, Target is enjoying an operating profit margin boost. Similarly, Walmart's U.S. segment is seeing its best earnings results in several years.
That profit improvement should accelerate in 2020 and beyond as companies like Walmart and Home Depot wind down their multiyear investment programs that have built completely refreshed store bases. As a result, investors can reasonably expect higher margins and faster earnings growth from the industry's best-performing businesses.
A few good options
If you're looking to add some retail stocks to your portfolio, it's best to stick to winners that have shown that they can compete in today's multichannel selling environment. Proven, best-in-class giants like Home Depot and Costco are good bets, as they've been steadily winning market share for years. TJX Companies (TJX +0.55%) is another attractive candidate that pairs sales growth with a strong financial operating model. Shareholders have seen that approach deliver nearly 25 consecutive years of rising dividends, meaning this retailer is set to join the exclusive Dividend Aristocrat club at the start of 2021.
If you'd prefer to boost your exposure to the industry without having to pick individual winners, consider a diversified index fund. The Vanguard Consumer Staples ETF (VDC +0.32%) will give you ownership in leaders like Costco and Walmart along with a few other staple investments, without having to worry about leaning too heavily on just a few names. In any case, if you've shunned this competitive industry in the past, it might be time to take a fresh look at some top retailing stocks.
