My Top Two Retail Stock Picks

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Welcome to part six of Market Maneuvers—our special series to profit through market volatility.

While no one was really looking for the “data dependent” Federal Reserve to lift interest rates during its two-day Federal Open Market Committee (FOMC) meeting this week, Wall Street still anxiously awaited the Fed’s statement. And, as expected, the Fed’s comments were much of the same.

In yesterday’s FOMC statement, the Fed commented that the U.S. labor market is showing signs of further improvement. It noted that there have been solid job gains, a decline in unemployment and the “underutilization of labor resources has diminished.” Of course, the Fed followed that up by saying it’s still looking for further labor market improvement and inflation to move back towards 2% before lifting interest rates from their near-zero level.

Fed policymakers are also keeping a close eye on global economic concerns that came to the forefront in July, namely Greece and China. China, in particular, is now the subject of close scrutiny, as the economic growth engine is tapping the brakes and only projected to grow 7% this year.  While that’s still solid economic growth, it’s a far cry from the double-digit growth China has been known to post in recent years—and that has many wondering how it will impact the global economy overall.

Overall, though, Wall Street cheered the Fed’s inaction with interest rates once again, as the Dow and S&P 500 posted a solid two-day rally. Both indices rose nearly 2% between Tuesday and Wednesday trading. Looking forward, I continue to believe that the Fed will not raise interest rates this year—or even next year since it’s an election year. However, if the Fed were to surprise with a rate hike, it would be a one-and-done increase in December.

And in this environment with an accommodative Fed, I continue to recommend investing in companies with solid sales and earnings growth. Today, I have two companies in the retail sector that are great buys right now.

Two Retail Bargains

So far this year, retail sales have been pretty mixed. After falling in both January and February, retail sales bounced back for the next three months straight. March sales bounced a stunning 1.5%, while April sales grew 0.2% and May sales increased 1%. And then, of course, June retail sales disappointed, slipping 0.3%.

In the past 12 months, retail sales have only risen 1.4%. Many U.S. consumers remain cautious, given the still recovering economy, and as such, they’re not too willing to hand over their hard-earned money for just anything. Yet, give U.S. consumers a special deal and they just might come out of the woodwork…

Earlier this month, Amazon (AMZN) made headlines with its special “Prime Day” shopping event. The company reported that it sold 18% more products than its Black Friday sale in 2014. In fact, Prime members purchased 34.4 million items, products that included the Lord of the Rings movie trilogy, Croc sandals, board games, diapers, smoothie mixes, Kindle Fires and much more.

Now, some analysts are projecting that Amazon’s Prime Day—coupled with other similar events, like Wal-Mart’s (WMT) rival sale that included more than 2,000 online “rollbacks—could add as much as 0.6% to July’s total retail sales. Now, we won’t have July’s retail figures until mid-August, but it makes one wonder if retail stocks are worth a second look right now.

According to Portfolio Grader, stocks classified as Specialty Retail or Food & Staples Retailing have been gradually improving over the past two years. In fact, in 2014, 134 stocks fell into this classification and received an overall C-rating. This year, there are 129 stocks with an average B+ rating. So if you look in the right corners of this sector, there are good buys right now; two of which I’d like to highlight today.

CVS Health Corporation

First, I’ve been a big fan of CVS Health Corporation (CVS) for a while now. The company provides integrated pharmacy health care services in the U.S. and is best known for operating more than 7,700 CVS pharmacies and Longs Drug stores throughout the U.S. CVS pharmacies are stocked up with prescription and over-the-counter drugs, beauty products, seasonal merchandise, greeting cards and a limited selection of convenience foods.

Back in early May, the drugstore chain released first-quarter operating results that beat the consensus estimate. Net revenues increased 11.1% year-over-year to $36.3 billion, beating estimates for $35.93 billion. And earnings rose 8% year-over-year to $1.22 billion, or $1.07 per share, above estimates for $1.08 per share.

The second quarter, which will be announced on August 4, is lining up to be just as strong. Analysts are expecting earnings per share of $1.20 on $37.18 billion in sales, which translates to 6% annual earnings growth and 7.4% annual sales growth. Given its continuing sales and earnings strength, it’s no wonder that CVS earns a solid A-rating from Portfolio Grader. So CVS is a Strong Buy right now.

The Kroger Co.

The Kroger Co. (KR) is another favorite stock of mine, as it’s a strong domestic company with an inherent edge over multinational companies given the strong U.S. dollar. With 2,626 supermarkets across 34 states, Kroger is known for being one of the nation’s largest retail grocery chains. But what many don’t know is that the Kroger umbrella also covers 1,342 gas stations, 780 convenience stores, 327 jewelry stores (yes, jewelry!), 2,117 pharmacies and 37 food processing facilities. The company brought in $108.5 billion in 2014.

In June, Kroger reported that first-quarter 2015 earnings increased 24% to $619 million, or $1.25 per share, beating estimates for $1.22 per share. Sales grew 0.3% to $33.1 billion, which just missed estimates for $33.34 billion.

For the second quarter, to be released on September 11, the consensus estimate is for earnings of $0.40 per share on $25.46 billion in sales, which translates to 14% annual earnings growth and 0.6% annual sales growth. Again, thanks to solid earnings and sales growth, Kroger earns a covered A-rating from Portfolio Grader. KR is a Strong Buy.

I’ll be in touch on Tuesday with your next Market Maneuvers. We’ll be covering the latest headlines and the best way to navigate the energy sector.


Louis Navellier

Louis Navellier

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