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Should I Buy Retail Stocks Now?

By Jennifer Saibil - Mar 13, 2020 at 8:20AM

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With the markets playing see-saw and apparel retail already in turmoil, is this the time to buy in or bow out?

A day after the biggest stock market drop since the financial crisis in 2008, stocks were soaring again on Tuesday -- and then falling again on Wednesday and Thursday. The stock market has seen drastic rises and falls over the past two weeks as COVID-19, the disease that the coronavirus causes, has spread internationally and fears have emerged about how this will affect the global economy. 

It's clear how this could affect companies that deal with travel or others that have a strong international presence, but the effect is being felt in many more industries, including retail. 

Why would retail feel the heat?

One of the reasons retail investors might be worried is that U.S. consumers are starting to stay home. Major centers for mingling, such as sports arenas and malls, are already seeing fewer people coming out to get together in light of contagion fears. With fewer shoppers hitting the shopping strip, companies that rely on foot traffic are going to suffer. 

Shoppers in a shopping center.

Image source: Getty Images.

The good news is that retailers with a strong online presence won't be too miffed about this development. In fact, it may turn out to their benefit, as shoppers switch to digital to get their stuff. 

However, there are other reasons coronavirus might turn the market on retail. Another way global events influence retail is supply chain issues. Companies that rely on international suppliers and manufacturers, especially in China, may find new challenges in churning out their products. And in general, when the market's not looking too good, the entirety will be swept up in the frenzy.

Choosing the right investments

These factors and others affect different companies to different degrees, and that's how investors should approach what looks like a market correction. Long-term investing requires sweating through the tough times with solid companies that won't collapse when the market seems like it's ready to. In fact, while scared investors are selling out, it may be the perfect time to buy.

Some retailers, such as Target (TGT 0.81%), have seen their share prices drop along with the market, but it has a healthy business model with a strong e-commerce arm and this is a good opportunity to buy shares at a more moderate price. Other retailers whose stock has fallen quite low are Urban Outfitters (URBN 2.14%) and American Eagle Outfitters (AEO 2.24%).

Alternatively, companies that have seen falling share price because of trouble much deeper than coronavirus aren't an opportunity at all. For example, Gap (GPS 3.03%) lost about 30% of its stock value in 2019 and another 30% since the beginning of 2020, and Macy's (M -1.91%) lost almost half of its stock value in 2019 and another 30% in 2020. 

Then there are the rare companies that don't seem to have been affected much at all, such as Costco (COST 1.35%) and Walmart (WMT 0.86%). These blue chips are hardy enough to withstand overall market drops. While they don't present the specific opportunity of a low share price, this is when you can see that they're robust and develop confidence in their ability to perform under duress. That makes this a great time to buy-in.

What about tomorrow?

Things may get worse before they get better and the bear is officially running the market now. The market is very likely to continue to fluctuate along with the daily chaotic headlines. But that shouldn't shake a long-term portfolio if investors believe in the companies whose shares they own.

Retail was ripe for some serious market changes due to general tailwinds in global retail trends, and these forces are bound to shape the next generation of retailers.

The bottom line is that it's a great time to buy shares of great businesses that have durable business models, especially if they've dipped lower and you can leverage a market correction. 

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Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$485.76 (1.35%) $6.48
Target Corporation Stock Quote
Target Corporation
$142.38 (0.81%) $1.15
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$122.63 (0.86%) $1.05
The Gap, Inc. Stock Quote
The Gap, Inc.
$8.49 (3.03%) $0.25
Macy's, Inc. Stock Quote
Macy's, Inc.
$17.97 (-1.91%) $0.35
Urban Outfitters, Inc. Stock Quote
Urban Outfitters, Inc.
$19.06 (2.14%) $0.40
American Eagle Outfitters, Inc. Stock Quote
American Eagle Outfitters, Inc.
$11.43 (2.24%) $0.25

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

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