U.S. stocks have done well this year. The S&P 500 index has gained 14.4% through Oct. 8. But the retail sector hasn't fared nearly as well, with the S&P 500 Retail Composite up only 4% due to various economic concerns, including the Trump administration's tariff policy.

With the sector currently out of favor, this gives long-term investors an opportunity to examine individual companies. These two top my list of stocks to purchase. They should appeal to value investors based on their valuation and long-term prospects.

 

1. Target

Target (TGT -3.73%) has become a popular retailer by offering unique and exclusive products along with basic items (like groceries). This drew customers, and the company became very successful.

Lately, sales have been weak. Target's fiscal second-quarter same-store sales (comps) fell 1.9%. Traffic contributed a 1.3-percentage-point decline, and spending accounted for 0.6 percentage points of the drop. This was for the three months that ended Aug. 2.

There are a few reasons for Target's sales decline. First, consumers have been squeezed by higher overall prices that affected their ability to spend on discretionary items. I don't find that concerning, given that cycles end, inflation rates will abate at some point, and people will spend more.

Target's management also admitted missteps in its merchandising strategy. But incoming CEO Michael Fiddelke promised changes like improving store quality, offering trendier merchandise, and investing in technology. These seem like good approaches to fixing these long-standing problems. Fiddelke, currently chief operating officer, will formally start his new role on Feb. 1.

The last issue confronting Target is also self-inflicted. Earlier this year, the company pulled back its diversity, equity, and inclusion initiatives. This caused backlash, and groups boycotted the stores and website. Management has taken steps to rectify the situation, including meeting with community leaders.

Target's share price performance reflects these challenges. The stock dropped 40.3% in 2025 through Oct. 8, while the S&P 500 index gained 17.4%.

I believe the economic issues and merchandise offerings will improve as Target gets back to what made it successful. And if management takes steps to improve the dialogue, I expect boycotts will end. Meanwhile, the stock sells at a price-to-earnings (P/E) ratio of 11. That's a heavy discount compared to the S&P 500's P/E multiple of 31.

2. Home Depot

Home Depot (HD -0.51%) dominates the home improvement retail sector. Its annualized sales and current store count -- $170 billion and more than 23,500, respectively -- dwarf Lowe's $90 billion and more than 1,750 locations.

However, the home improvement sector has seen its share of challenges over the last couple of years. That's due in part to larger economic concerns, including higher prices, that have caused homeowners to delay major improvement projects.

Home Depot's fiscal second-quarter comps increased a tepid 1.4% after excluding foreign-currency translation effects. Spending increased while lower traffic hurt comps. The period ended Aug. 3.

At some point, interest rates will drop, lowering borrowing costs. And homeowners will feel comfortable undergoing big renovations. Management has also been expanding to increasingly target professional contracts. It announced the acquisition of GMS, a distributor of specialty building products, including drywall, ceilings, and steel framing used in residential and commercial end markets. Hence, when the environment becomes more favorable, it seems likely that pros will turn to Home Depot, and sales growth will accelerate.

The company's shares have underperformed the overall market in 2025, gaining just 0.1%. That's led to the stock's P/E ratio staying constant at 26.

This means that the stock has a cheaper valuation than the S&P 500's P/E multiple.