Despite evidence of resiliency throughout the economy, including in consumer sentiment, the job market and the stock market, not every sector has come through the first half of the year unscathed.
Of note, consumer discretionary has been the worst performing of the 11 S&P 500 sectors, and retail stocks are one of the few areas of the market with negative year-to-date returns.
It’s not hard to see why.
The consumer goods that Americans buy the most of – like toys, inexpensive goods, and apparel – are primarily made overseas.
And the countries like China, Indonesia and Vietnam that manufacture those goods are facing the threat of the highest tariffs.
Combine that with rising fears of a U.S. recession, and retailers could be facing a double whammy of higher prices and fewer buyers.
Note that I said “could.”
For the time being, tariffs are on hold. The 90-day pause on high tariffs that President Trump implemented earlier this year is still in effect. So as of this moment, there are no high tariffs.
At the same time, trade negotiations are ongoing, so deals to avoid tariffs could be worked out with each of the roughly 130 nations they were levied against before they ever do any real damage.
If that happens, then it could be a “no harm, no foul” situation, and the U.S. economy will continue on its merry way, with consumers never really reining in their spending.
Indeed, most of the hard data still points to a healthy U.S. economy. Inflation is down to a four-year low. Corporate earnings showed a second straight quarter of double-digit growth. The jobs market is holding up fine. U.S. GDP contracted slightly in Q1, but with major caveats, as companies tried to frontload their imports to avoid impending tariffs, causing the number (-0.3%) to skew negative.
While retailers did not match the earnings growth of the average S&P company in the first quarter – consumer discretionaries reported 8.4% EPS growth vs. the 13.3% growth rate among S&P companies as a whole – that’s well ahead of the mere 0.6% growth that was expected from retailers before earnings season began, as the sector posted more earnings season surprises than any other sector aside from communication services.
In other words, U.S. retailers are doing just fine. Their share prices are not. And therein lies an opportunity.
3 Bargain Retail Stocks to Buy Now
What are some of the more undervalued retail stocks? Here are three with intriguing combinations of value and growth:
Bath & Body Works (BBWI)
Forward P/E ratio: 7.9
Price-to-sales: 0.82
Projected 2025 EPS growth: 8.8%
Urban Outfitters (URBN)
Forward P/E ratio: 14.1
Price-to-sales: 1.14
Projected 2025 EPS growth: 9.6%
Hilton Grand Vacations (HGV)
Forward P/E ratio: 11.4
Price-to-sales: 0.80
Projected 2025 EPS growth: 14.6%
In addition to these discounted retailers, I currently recommend two others in my Cabot Value Investor advisory, both of which have posted impressive early returns. If you want to know their names, simply click here. But you could probably do just fine with any of the three retailers listed above.
On the heels of a swift market recovery, value opportunities are getting harder to come by. But plenty of retail bargains remain. And these are just three of the more appealing options.
