It’s been a weird year for retail stocks.
Heck, it’s been a weird year for many stocks given the crazy dynamics surrounding the coronavirus crisis.
For some retail companies, the crisis wound up being a blessing in disguise. With people stuck at home, demand for everything from toilet paper to home gym equipment skyrocketed.
Meanwhile, sales in other areas like office apparel and luggage for travel dropped off a cliff.
It took a while for retail stocks to settle into a predictable pattern.
But as we head into 2021 and one of the most widely anticipated economic recoveries, the picture is getting clearer.
Today, I wanted to share three retail stocks that should do very well as the reopening develops.
We’ll also take a look at three retail stocks that leave investors with a lot of risk. So you may want to avoid these names.
Let’s jump right in!
The Case for Healthy Spending in 2021
Things are looking good for consumers in the new year!
For starters, Congress seems close to getting its act together on a new stimulus package. And whether the money goes to help small businesses keep their workers or directly to Americans, the cash will ultimately wind up in the bank accounts of consumers willing to spend.
A second tailwind for consumer spending next year is fueled by the booming housing market.
With interest rates making mortgage payments more affordable and a mass exodus of people from crowded cities like New York and Los Angeles, demand for single-family homes has been skyrocketing.
Of course, the demand has driven home prices higher. And as prices rise, homeowners are increasingly tapping into the equity in their homes by refinancing their mortgages.
Take a look at the surge in cash-out financing this year. Refinancing has added tens of billions to the bank accounts of homeowners across the country.
[Quick note from Zach… I posted this chart on our Rich Retirement Letter Twitter feed yesterday. Hopefully, you saw it! If not, consider checking out our Twitter feed using the link above, and be sure to hit “follow” at the top-right of the screen!]
With so much cash on hold and more on the way as the refinancing trend continues, we can expect consumer spending to be robust next year!
Let’s take a look at some of the best retailers that will profit from this trend in the coming year.
Three Winning Retail Plays for 2021
Our first retail winner is the apparel store Abercrombie & Fitch Co. (ANF).
As vaccines roll out and the coronavirus risk declines, people will begin freshening up their wardrobes to attend events and get together with friends.
While ANF lost money during the crisis because people stayed home and bought fewer clothes, the reopening should drive profits sharply higher.
Wall Street analysts expect ANF to generate $1.10 per share in profits next year.
The stock has been picking up momentum in the second half of this year, but still trades at an attractive value given the company’s earnings growth.
My second retail pick for 2020 is The Home Depot Inc. (HD).
With home prices rising and strong demand for homes in the suburbs, HD can count on significant demand from builders around the country.
Meanwhile, many existing homeowners are tapping into their home equity to fund remodeling or landscaping projects. These projects naturally drive more sales growth for HD.
The stock has been treading water for the last few months, while the underlying environment for HD’s business continues to improve. As a bonus, you’ll lock in a 2.2% dividend yield while you wait for the stock to trade higher.
And last but not least, shares of Walmart Inc. (WMT) look like a great buy for 2021.
The company has done a great job of building out its online customer base throughout the coronavirus crisis. And this strength should help WMT continue to compete against Amazon throughout the next year.
And according to a recent Wall Street Journal report, the highest expected increase in spending will come from households earning less than $50,000 per year. This bodes well for much of the merchandise offered by WMT.
While these three plays should perform very well next year, I’ve got some concerns about a few other retail stocks…
Three Retail Stocks to Avoid Next Year
Let’s start with shares of Macy’s Inc. (M).
The mall retailer was already facing big challenges before the crisis hit. As consumers spent less time at malls and ordered more merchandise online, Macy’s overall business model failed to keep up with the times.
When the vaccine announcements hit in November and investors started to bet on an economic reopening, shares of M rebounded to make back some of their losses.
But the underlying business issues are still a challenge to the company. And I expect the rebound will be short-lived.
My second retail stock to avoid is Amazon.com Inc. (AMZN).
Yes, I understand that AMZN has been a big beneficiary of online shopping during the crisis. And Amazon Web Services (or AWS) has helped AMZN profit from the work from home trend.
But the stock is now sporting a $1.6 trillion market cap and has been inflated by index funds blindly buying the biggest stocks in the S&P 500.
Now we’re seeing a big shift in capital away from large-cap stocks like AMZN and towards smaller cap value plays. This trend still has plenty of room to run, creating a major headwind for AMZN this year.
And finally, I would steer clear of Wayfair Inc. (W).
This is another name that has done quite well during the coronavirus crisis but now poses a risk given its inflated valuation.
Wayfair helps small businesses sell merchandise online. And as a company, I believe this business has plenty of room to run.
But shares are trading for about $275, while the company is expected to earn only $2.40 per share next year. That means investors are paying roughly $115 for every dollar that the company will make next year.
That’s expensive and leaves us with a lot of risk. If anything goes slightly wrong with this business next year, the stock could lose a large portion of its value, leaving investors with big losses.
So there you have it! Three retail stocks to buy for 2021 and three to avoid.