What are we looking for?
U.S. retail stocks that appear attractive after recent price declines.
Retail is one of the few parts of the U.S. market that has not benefited significantly from recent stock market gains. Bad news from large retailers such as Sears, J.C. Penny and Macy's has contributed to a general malaise in the industry and a fear that traditional retail is losing out to online giants such as Amazon.com. However, recent earnings from Costco and Best Buy have been outstanding – leading one to wonder whether the whole sector has been unfairly driven down over concerns affecting just a small number of stocks.
The screen
We will be using Recognia Strategy Builder to identify retailers that may have been unfairly punished in the sector's recent sell-off. We begin by setting a minimum market capitalization threshold of $1-billion (U.S.). We wish to focus on large cap names in the market because of the greater stability and safety that they offer. Approximately 25 per cent of U.S. stocks have a market cap in excess of this threshold.
Second, we will screen for stocks with strong fundamentals. We will select companies with a forward price-to-earnings ratio of 20 or less, debt to equity of 1.2 or less and a return-on-sales ratio of at least 5 per cent. Return on sales is also called net profit margin and indicates how profitably the firm is able to operate its business.
Finally, to look for stocks that are already sold down, we will select only companies trading at least 25-per-cent off their 52-week highs. Strategy Builder's rankings reflect the overall fit of the stock against all of these factors.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
GameStop is a video game and consumer electronics retailer that has struggled through some tough times over the past year. Although its results have been steady, some analysts have been wary of its ability to compete with online retailers and have suggested it is "the next Blockbuster, Radio Shack or Circuit City." That being said, Gamestop now has some strong fundamentals with a very low forward P/E ratio of 6.7, low debt and 6.3-per-cent return on sales.
Athletic wear retailer Foot Locker is an example of a retail stock that appears to have been unfairly punished over the past few weeks. After a strong 2016 performance, Foot Locker released first-quarter earnings in early May that missed analyst earnings-per-share estimates by just two cents (actual $1.36 versus $1.38 expected). The stock went on to shed over 16 per cent of its value. Even more surprising, Foot Locker's same-store sales for the quarter were up and the EPS miss was blamed primarily on delayed IRS tax refunds. Foot Locker has the highest return on sales on our list at 12.6 per cent.
The biggest drop from the 52-week high of any company on our list belongs to Signet Jewelers, the world's largest retailer of diamond jewellery. Since hitting a 52-week high on Dec. 9, the stock has suffered through a 44.7-per-cent price drop due mainly to poor first-quarter results and a general malaise in the jewellery industry. Signet now has a forward P/E ratio of just 7.6 – the lowest in many years.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.