Value in a Box: 6 Discounted Retail Stocks to Add to Your Portfolio

As we close out the holiday shopping season, investment experts continue to see long-term value in select retailers, particularly at big-box stores catering to apparel, gardening and home improvement. Several contributors to MoneyShow.com suggest ways to add retail discounts to your portfolio. Jim Pearce, Investing Daily's Personal Finance Target has been a star performer; it has generated a total return of 433% since we added the stock to our portfolio in April 2017. Certainly, the coronavirus pandemic has accentuated the virtues of the measures taken by Target over the past five years to facilitate its online merchandising capabilities. Prior to the pandemic, Target had already begun the process of redesigning its stores to cater to its traditional in-store shoppers while making it easier for online shoppers to pick up their orders at a nearby store. The fruit of that labor was evident in Target's fiscal 2021 third-quarter results as comparable sales rose by 12.7% on a YoY (year over year) basis. That performance was driven by a 29% gain in digital comparable sales in addition to the 9.7% increase in comparable store sales. All five of Target's primary merchandising categories experienced double-digit growth during the quarter. As a result, the company recorded a 51.6% jump in third-quarter GAAP (generally accepted accounting principles) EPS (earnings per share). Despite appreciating 43% over the first 11 months of this year, Target is valued at a lower forward price-to-earnings ratio and price/earnings-to-growth ratio now than it was at the start of the year. Long story short, I see nothing to suggest that Target has become overvalued. To be sure, owning shares of Target now is not the no-brainer decision it was a few years ago when the stock was clearly undervalued. However, the company has proven that it deserves a higher multiple to sales and earnings based on its ability to consistently deliver top-tier results. Target is a buy up to $260. Ingrid Hendershot, Hendershot Investments The TJX Companies is the leading off-price retailer of apparel and home fashions in the U.S. and worldwide, operating a total of 4,684 stores. These include 1,285 T.J. Maxx, 1148 Marshalls, 850 HomeGoods, 55 Sierra and 39 HomeSense stores in the United States. As the largest off-price retailer, TJX has tremendous buying power and solid relationships with more than 21,000 merchandise vendors in 100 countries. This retail recipe engenders strong brand loyalty from consumers of all ages. TJX reported third-quarter revenues rang up a 24% gain to $12.5 billion as overall open-only comparable store sales increased 14%, driven by a 34% comparable store sales gain at HomeGoods. This is the third consecutive quarter that comp store sales increased mid-teens or better. Operating profit jumped 37% to $1.4 billion with net income and EPS each up 18% to $1.0 billion and $.84, respectively. These results were well above management's plan thanks to robust sales trends throughout the quarter. The home businesses across all divisions continued their phenomenal performance while the apparel business rebounded from the pandemic with comp store sales increasing by mid-single digits. Fiscal year-to-date, the company generated $1.9 billion of operating cash flow and ended the quarter with $6.8 billion of cash. During the first nine months of the fiscal year, TJX paid $942 million in dividends and repurchased 16.3 million of its shares for $1.1 billion at an average price of about $67.48 per share. TJX's great values resonate well with its consumers around the world especially during inflationary times. Long-term investors shopping for a bargain should consider The TJX Companies, a well-managed high-quality business which is gaining market share with strong brand loyalty, outstanding cash flows and substantial share repurchases. Buy. Ross Stores, Inc. currently operates Ross Dress for Less, an off-price apparel and home fashion chain in the U.S. with 1,629 locations. The company's focus has been on bringing customers a constant stream of high-quality department and specialty store brands at extraordinary savings. As a leading off-price retail chain, Ross is able to negotiate the best deals for the top brands and latest fashions from their many vendors. The company is able to provide additional value to their customers and their bottom line by offering a no-frills shopping experience with low-cost displays and fixtures. Ross Stores has a highly profitable business model that generated an average return on shareholders' equity of 47.5% in the four years prior to the pandemic. The consistent long-term profitability of the firm showcases management's ability to navigate challenging retail environments amid inflationary headwinds. Profitability is rebounding in 2021 toward historical levels with the reopening of the economy. Ross Stores reported third-quarter sales increased 22% to $4.5 billion with net earnings and EPS jumping approximately 190% to $385 million and $1.09, respectively. Comparable store sales were up 14% for the fiscal quarter. Ross Stores suspended the dividend during the pandemic to prudently conserve cash flow while stores were closed. As stores reopened, Ross resumed its dividend thanks to its strong cash flows and increased the 2021 dividend to $1.14 per share, representing a 16% annual growth rate over the last five years. Management has been conservative with their financial outlooks. Ross is now planning earnings per share for fiscal 2021 to be in the range of $4.65 to $4.75 on a comparable store sales gain of 12% to 13%. Long-term investors shopping for a bargain stocking stuffer should consider Ross Stores, a high-quality company with profitable operations and strong cash flows. Buy. Mike Larson, Safe Money Report The ubiquitous home improvement retailer, The Home Depot, Inc. , operates over 2,300 stores in all 50 U.S. states, 10 Canadian provinces, Mexico and U.S.-island territories like Guam. The company employs a half-million workers, generated $132 billion in annual sales last year and sports a hefty market capitalization of $418 billion. While Home Depot has always been a fantastic long-term growth company, it's really delivered in the shorter term. The pandemic prompted many homeowners to renovate, while encouraging others to move out of crowded cities to suburban and rural areas. All of that has turbocharged HD sales and profits. In Q3, it reported: $3.92 in earnings per share, crushing the average analyst forecast of $3.40; revenue of $36.8 billion, well above the $35 billion expected; and sales at stores open at least a year nearly tripled expectations. The news helped push Home Depot shares to a fresh all-time high. Then, during the post-Thanksgiving selloff, they held in very well. One reason: The selloff helped drive interest rates lower again, something that makes mortgages cheaper and supports real estate activity. Bottom line? In this low forever rate world with an uncertain economic outlook, you can't do much better than a stock like HD. Especially when you consider that its $1.65-per-share quarterly dividend is still good for a market-beating yield of 1.7% -- even after recent share price gains. That payout is also up 10% from 2020. I recommend you add a position in The Home Depot at the market. Chris Graja, Argus Research Lowe's is the world's second-largest home improvement retailer, with sales of $90 billion in FY21. We believe that CEO Marvin Ellison is demonstrating the experience and ability to improve operations and raise profitability at Lowe's. The company has improved its business analytics, upgraded its website, and streamlined its Canadian operations, which should lead to market share gains and better margin performance. Our bullish multi-year thesis is more dependent on business improvement than the macro environment. The company has expressed a commitment to raising the operating margin over a range of sales scenarios and gaining market share by improving merchandising and broadening its product offering. We believe that the major drivers of post-pandemic sales growth remain the same. There has been significant underinvestment in housing. About 70% of U.S. homes are more than 25 years old and likely in need of upgrades and repairs. Millennials are starting families. Mr. Ellison said on the 1Q22 conference call that the company's research findings show that the importance of the home will be elevated for many years to come. The shares are currently trading at 21-times our FY22 estimate and 20-times our FY23 estimate. We believe that LOW is attractive based on the company's financial strength and our expectations for market-share gains, improving margins and earnings. Based on our analysis, the shares would be worth approximately $320 using a dividend discount model with our new earnings estimates. Our valuation for Lowe's reflects our five-year growth rate of 14%, declining to 3% as the business and turnaround mature. The shares have an indicated dividend yield of about 1.3%, compared to a 10-year Treasury yield of 1.4%. The company has raised its dividend at a 17% annual rate over the last five years and we expect further increases. We are raising our target price to $290 from $285. We have confidence in CEO Ellison's turnaround plan amid continued strong demand for home improvement products. Doug Gerlach, Investor Advisory Service Central Garden & Pet manufactures and distributes products for two markets: pet supplies (approximately 60% of revenue) and lawn & garden (40%). The company began in 1980 as a pure distributor and has spent the last 40 years acquiring suppliers and competitors. It has made more than 60 acquisitions since 1992. Customers are mainly big-box retailers. Its top five customers of Walmart , Home Depot, Lowe's, Costco , and Petco accounted for 51% of fiscal 2021 sales. Historically the pet and garden markets have not fluctuated much, but the pandemic changed consumer habits, at least temporarily. It is estimated that pet ownership increased approximately 20% during the pandemic, and Central's results are consistent with these estimates. The company expects a very solid fiscal 2022, guiding to EPS growth of at least 13% in the coming year. The balance sheet is in good shape. Net debt is $750 million, about the same as total working capital. The valuation is modest at 16 times the low end of 2022 EPS guidance. We are attracted to the non-cyclical nature of the pet and garden markets, particularly at the mid- to lower-end where Central plays. Consumers generally trade down from name brands during recessions. We model 9% compound EPS growth starting from a base of $2.75, which could generate EPS of $4.23 in five years. That figure, combined with a high P/E of 21, generates a high price of $89. For a low price, we apply a P/E of 12.7 to trailing EPS of $2.75, producing a low of $35 for an upside/downside ratio is 4.1 to 1.

Value in a Box: 6 Discounted Retail Stocks to Add to Your Portfolio

Investment experts continue to see long-term value in the big-box space.

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