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2 Top Stocks to Buy in June

By John Ballard - May 30, 2021 at 9:30AM

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These strong-performing retailers are working hard to put the (still active) pandemic behind them.

If you're frustrated with the market volatility so far in 2021, you're certainly not alone. After a sharp rebound last year, the Nasdaq Composite has been very choppy this year but is currently up about 7% year to date. 

Two top retailers that are far outpacing the market averages are Target (TGT 0.53%) and Foot Locker (FL -0.29%). Both companies posted better-than-expected earnings recently that could point to growing momentum as the economy continues its effort to recover from the coronavirus pandemic. Here's why these two stocks could be profitable additions to your portfolio in the month of June.

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Image source: Getty Images.

1. Target

A year ago, investors were in awe of Target's 10.8% comparable-store sales growth as people rushed to stock up on home essentials. Target just blew that performance out of the water by reporting 22.9% comps growth for the first quarter of 2021. 

The strong quarter was largely driven by tremendous growth in online orders, with digital comps up 50% year over year, which is impressive coming on top of the phenomenal 141% increase in the first quarter of 2020. 

CEO Brian Cornell's statement in the earnings release suggested that Target should continue to reach new highs in performance beyond the pandemic: "Importantly, market-share gains of more than $1 billion in the first quarter, on top of $1 billion in share gains a year ago, demonstrate Target's continued relevance with our guests, even as they have many more shopping options compared with a year ago." 

Despite the stock's 29% rise year to date, you can still make a good argument that it's a solid buy at current levels. The shares trade at a forward price-to-earnings ratio of 18.5, which is a discount to the S&P 500's forward P/E of 22.4. 

What's more, management expects the company to post single-digit comps growth for the rest of the year, while longer-term, the consensus analyst estimate has Target growing earnings per share at a compound annual rate of 13%. Taken all together, Target may still have upside in the short and long term. 

TGT Chart

TGT data by YCharts.

2. Foot Locker

Foot Locker has survived the heightened competition in e-commerce, and for many people, it continues to be a go-to store to buy athletic shoes. Store closures caused sales to plummet by nearly 50% a year ago, but the business has come roaring back and seems poised to hit record revenue levels over the next few years. 

In the first quarter, sales came in at $2.15 billion, up 80% over the first quarter of 2020, as Foot Locker had easy comparisons to the sales trough in the year-ago quarter at the height of the worst economic effects from the pandemic. But most importantly, first-quarter sales were still 3.6% higher than in the same period of 2019, which shows the business is coming back stronger than before the pandemic.

CEO Richard Johnson said: "Our merchandise offering resonated very well with our customers, driving strength in our stores and continued momentum in our digital business. With strong product tailwinds, we remain optimistic about our category and our ability to drive long-term growth, profitability and shareholder value." 

Foot Locker remains a valued partner of top sneaker brands like Nike. Its high concentration of supply sourcing, in which 75% of merchandise was purchased from Nike alone in 2020, is not so much a risk as it is a valuable relationship. 

In February, Foot Locker launched a drop-ship program with Nike to give customers more access to inventory that is not listed on its site or in stores. It's an example of how Nike relies on Foot Locker's customer base to deliver the right products to consumers at the right time. 

The stock currently trades for 11.2 times forward earnings estimates. Given the increasing penetration of Foot Locker's digital business, now at 25% of total sales, and the pent-up demand that management reported seeing in areas where lockdowns are easing, there could be further upside with this retail stock in the near term. 

 

John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
TGT
$173.39 (0.53%) $0.91
Foot Locker, Inc. Stock Quote
Foot Locker, Inc.
FL
$31.43 (-0.29%) $0.09

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