For the first time in three years, Black Friday will feel something close to normal this year. There’s no Omicron surge (knock on wood), Covid cases are way down from the last two Novembers, and most people have gotten back to normal life, which will likely include getting an early start on their holiday shopping in a store. That would seem to bode well for retail stocks. But how well? And which ones?
Let’s examine the SPDR S&P Retail ETF (XRT), a good proxy for the retail sector. From 2010-2019, i.e., the decade before Covid threw a wrench into holiday shopping plans, XRT averaged gains of 2.2% in the three months that followed Black Friday, and therefore included most retailers’ first-quarter earnings reports the ensuing January or February. But that trailed the 3.2% average return in the S&P 500 over that same span. So, there’s no edge in buying a whole bunch of retail stocks in the hopes of a Black Friday bump.
That said, certain retail stocks do get a market-beating bump every year. The problem is, it’s not the same one every year. Amazon (AMZN), for example, was up 29% in the three months that followed Black Friday in 2017. The next year, it was down 1.2% over the same period.
Macy’s (M), which is synonymous with Thanksgiving and Black Friday sales, was up 25.6% in 2014-15, but down 28.3% in 2015-16.
Conversely, Walmart (WMT) was down 4.1% in 2014-15 but up 11.5% in 2015-16.
You get the point. There’s no real consistency from year to year as to which retail stocks get the Black Friday bump. What is consistent is that the retail stocks that are catapulted after Black Friday were already advancing heading into Thanksgiving.
3 Retail Stocks for Black Friday
Retail Stock #1: Home Depot (HD)
Home sales are in decline thanks to the Federal Reserve’s efforts to raise interest rates at warp speed this year. But that doesn’t mean people have stopped trying to improve the homes they have. In fact, Home Depot is expected to grow sales by 4.2% and earnings per share by 7.3% this year – healthy numbers, albeit down from the last two historically booming years for the real estate market. Those numbers are expected to slow to 1% growth (revenue) and 1.6% growth (EPS) in 2023, but considering how far the stock has fallen – and that it trades at just 18 times forward earnings estimates and 2 times sales – HD stock looks like a relative bargain.
And now it has momentum. Since bottoming at 266 in late September, HD shares are up 22%, and have really accelerated in November, boosted in part by solid third-quarter earnings in which the company beat EPS estimates by about 3%. With modest growth projected in this holiday quarter, another beat could be in the offing come mid-February. In the meantime, the stock trades well north of its 50- and 200-day moving averages.
Retail Stock #2: Ross Stores (ROST)
Dollar store stocks and discount department stores were once a Cabot favorite – particularly of my colleague, growth investing expert Mike Cintolo. But the pandemic crushed them, with sales all but evaporating in 2020 and much of 2021. Now, they’re “back” – or at least back enough to grab Wall Street’s attention as dirt-cheap value plays and turnaround stock candidates. And that’s what’s happening with Ross Stores, a discount department store that operates under the name Ross Dress for Less.
Ross’ sales hit a record high near $19 billion in 2021, a 50% recovery from the mere $12.5 billion it managed in 2020. This year, they’re on track for slightly less than that ($18.6 billion), but not by much. And after beating EPS estimates by 23% in the third quarter, reported a week ago, the stock took off, gapping up from 97 to 115 in just three trading days. Year to date, it’s the rare retail stock that’s actually up (about 2%), and it’s quickly gaining on its May 2021 highs above 130.
Considering the recent gap, you’d be wise to wait for the next dip to buy. But the momentum is real, and Black Friday could only help.
Retail Stock #3: Restaurant Brands (QSR)
Fast food restaurants were more resilient than most retailers through the pandemic. Now they’re thriving like it’s 2019. Restaurant Brands International, which owns popular fast food and coffee shop chains Burger King, Popeyes, Tim Hortons and Firehouse Subs, has been even better than that. Sales only dipped 11% in 2020; last year, they hit new highs of $5.74 billion, up 15.5% from 2020 and 2.5% from 2019, its previous apex.
This year, sales are on track for another record: $6.4 billion, a 12.8% improvement over 2021. Earnings per share are on pace for 11.7% growth. While sales should slow in 2023, they’re still expected to grow (+3.8%). All of that growth has been enough to push QSR shares up 9.3% this year, including a huge move from 52 to 66 in the last six weeks. The pullback this week looks like a buying opportunity as Black Friday (and hungry shoppers) arrive.
Though Covid has waned, 40-year high inflation has taken its place as the obstacle du jour that could keep some Black Friday shoppers at home this year. But take Black Friday out of the equation for a second. I believe in trends and charts, and all three of the aforementioned retail stocks look very good on both fronts.
Add one or all of them to your Black Friday shopping cart. But all of them are doing just fine even without the year’s biggest shopping weekend.
If you want to learn what other momentum stocks we’re recommending as the holidays approach, you can get yourself the gift of a subscription to Cabot Stock of the Week. In it, you’ll find strong momentum stocks to buy now.
*This post has been updated from an original version, published in 2017.