"When Black Friday comes..." The lyrics of the great Steely Dan song are echoing in my head as I look at retail stocks these days. The sector's relative underperformance couldn't be any more stark, as the Retail Select SPDR ETF (XRT) has fallen 9.0% year-to-date versus a 29.5% gain for the (QQQ) Nasdaq 100 SPDR ETF.
Will America's favorite shopping day turn out to be the catalyst to wake this group from its slumber? Probably not, but I do I believe there are opportunities in individual names. Real Money's editors tasked me with identifying two actionable Black Friday plays, and I will focus on Target Corp. (TGT) and Best Buy Co, Inc. (BBY) .
The activity in Target should come before Black Friday. As with most retailers, Target is on a January fiscal year, so the company will report earnings -- no date has yet been announced -- in mid-November. Also, TGT pays its regular quarterly dividend to holders of record as of Nov. 15. That dividend of $0.64 is looking increasingly attractive as TGT shares pull back, and now represents an annualized yield of 4.2%.
Target management reiterated their earnings guidance in a press release dated Sept. 25. In that release, management noted, "Target expects both third-quarter and fourth-quarter 2017 comparable-sales growth will be within the range the company experienced in the first and second quarters of 2017, and expects its full-year 2017 comparable-sales growth will be in a range around flat, plus or minus 15. For third-quarter 2017, the company continues to expect both GAAP EPS from continuing operations and Adjusted EPS of $0.75 to $0.95."
Zack's consensus for TGT's third-quarter EPS is $0.85, right in the middle of management's guidance range. So, the play on TGT is to go long ahead of the dividend and hope for better-than-expected earnings and comps sales figures. A positive outlook for management on the Christmas shopping season on that conference call would be the tinsel on the tree. In that scenario, you would have made a solid profit on your TGT trade before Black Friday kicks off that season in earnest.
In contrast with Target, Best Buy shares have rocketed this year, and have even outperformed the red-hot Nasdaq -- with a 33% year-to-date gain. That said, at just under $57 per share as of this writing, BBY shares have yet to reclaim their August peak of $62 per share. BBY shares were hit after the company's fiscal second-quarter earnings report on Aug. 28, as management guided to lower margins going forward.
BBY's August press release noted, "From a profitability perspective, while our original full-year guidance anticipated an increased level of investments for FY18, we have made strategic decisions to proactively make additional Q3 and Q4 investments to continue to drive our Best Buy 2020 strategy forward." Actually I could have summarized that very long sentence with one word: Amazon (AMZN) .
I get the sense that Amazon is going to be very, very aggressive with price this Holiday season. The Wall Street Journal reported that Amazon has cut prices on some third-party merchandise by up to 9%, essentially offering an Amazon-sponsored discount for those goods sold on its site. I think this is the first salvo, not the last, to be fired in a price war for goods, especially electronics, this Christmas season.
So, I would stick with the big-box, broadlines -- including, TGT, of course, and Walmart, Inc. (WMT) -- and watch out for the electronics specialists on this Black Friday. I'd rather be short BBY than long going into the holiday season, and that could act as nice hedge against a long position in TGT. Jeff Bezos may be the one in control of the naughty or nice list this year, and I would rather not be on the other side of his benevolence... or lack thereof.
Check out all of Real Money's Black Friday Stock Picks:
