Stocks are usually distinguished in groups based on a specific parameter or industry in the stock market. One of the most commonly-discussed stock groups includes retail stocks.
Not sure whether retail stocks are the right securities for you? We’ll help you decide and show you how to take advantage of them.
Quick Look: The Best Retail Stocks to Watch Out for
Overview: What are Retail Stocks?
A retail stock is a security that lists a company, which business activity is retail selling. A retailer is a company that sells small quantities to each of their clients. Physical and online stores qualify as retailers.
Retail stocks are getting very hot nowadays, especially the ones that represent digital companies. The main reason for this is technological progress, which the world is accounting for.
A lot of big retailers already have an online platform, where they account for a big amount of their yearly turnover. Other retailers are 100% online based.
Now that most of the people in the developing and the developed countries have access to online retail stores a bigger part of the shopping happens online. This is the reason why retail stocks are expanding in value causing the interest of the investors.
What to Look for in a Retail Stock
The expanding retail business doesn’t mean that every retail stock performs well. Thus, you need to learn how to distinguish the retail stocks that have potential and how to avoid the ones that don’t.
The revenue reports of a retail company are showing how good the company performing and the steps it should take next. You can use a stock screener like Finviz or Yahoo! Finance to attain the revenue figures of a company.
Good retail stocks will show a trend in revenue.
We need to know how the company performs in terms of earnings to discover if it is profitable after all. Even if the sales figures are good, this doesn’t mean the company is profitable. A combination of good sales data and earnings is an indication of a healthy retail stock.
Price-to-earnings (P/E) ratio
The P/E ratio of a company shows the number of earnings a stock brings compared to its price. The higher the earnings compared to the price, the lower the P/E ratio, and opposite.
If the P/E ratio is low, at 10 or lower, then the stock is paying well compared to its price per share. At the same time, a low P/E ratio could mean that the price of a stock is likely to increase in order to normalize the earnings as a percentage.
If the P/E ratio is high, at 20 and higher, this means the earnings are not that high compared to the price of the stock. A high P/E ratio might lead to a stock price drop so the earnings per share will normalize compared to the stock price.
Of course, this is just the raw theory. In practice, these correlations strongly depend on the company’s state and objectives.
The beta of the stock shows 2 things, benchmark correlation and volatility.
The beta usually varies between -1 and 1. The higher than 0 the value, the higher benchmark correlation we have. However, the higher the distance from the 0 and also if it goes above 1, this means the stock is very volatile.
The lower than 0 the value, the higher negative correlation we have with the benchmark index. It won’t be an exact mirror image, but the major ticks are likely to match.
Also, if the value gets way below 0 and even below -1, this is an indication of low volatility. The higher the stock volatility, the riskier it is. At the same time, it might show more opportunities as volatile stocks tend to create big ticks.
It is very important to know what is the real accelerator of the price increase you expect. If a company is doing nothing, the stock price will neither increase or hold.
A company needs to grow in order to expand its share price. This is usually achieved by approaching new opportunities for expansion, new markets, building new stores, creating new service, etc.
1. Amazon (AMZN)
This is one of the most commonly discussed stocks nowadays. The reason for this is that Amazon is a very diversified company, which operates in more than one fields:
- Retail sales
- Cloud services
- Artificial intelligence
Amazon is a multinational corporation, which started as a retail seller of music and later on books. Amazon grew to one of the top e-commerce companies around the world.
Its expansion includes:
- The acquisition of Whole Foods for $13 billion
- He launches of AmazonGo – a store with no checkouts
- Announced plans to expand in the Middle East
Amazon shows solid trends in revenue and net income. The stock shows a very high P/E ratio and a very high beta – correlated with the benchmark, and very volatile. But these parameters are standard for a corporation, whose security falls in the category of a growth stock.
The acquisition of Whole Foods is a massive step forward in their expansion, and the integration of AmazonGo in physical stores for shopping without checkouts speaks that Amazon keeps setting technology trends. Furthermore, Amazon plans expansion in a new market, the Middle East.
The price action of Amazon during the past years show a sharp bullish trend, which goes together with a high dose of volatility. This trend was interrupted in the end of 2018. However, the stock shows clear attempts to resume the bullish trend.
2. Kroger (KR)
Kroger is another huge retailer among the top companies in the United States. Kroger operates as a supermarket chain with thousands of supermarkets all over the U.S..
It’s expansion has included:
- Partnership with Instacard to expand in the groceries delivery sector
- Integrating the Scan Bag Go service, which will eliminate checkouts
- Expands in the fashion apparel by announcing own brand
Kroger shows a 4-year trend in its revenue. In terms of net income, there was a trend for 2015, 2016, and 2017. However, it got interrupted in 2018, where revenue is nearly as much as in 2017, not a big deal after all.
The price-to-earnings ratio of Kroger is relatively low at 6.46. This means the stock might be undervalued compared to its earnings. In some cases, this is an indication of an upcoming stock price growth. The beta is 0.81, which shows high benchmark correlation with decent price volatility.
Kroger has undertaken a big expansion in the groceries delivery sector with setting their partnership with Instacart, a brand new field of action for the company. Also, they plan not to stay behind Amazon with planning to integrate shopping without checkout.
At the same time, they are launching their own fashion brand, which is another new field of action.
Things look a bit differently by Kroger. The stock has been increasing sfrom 2012 to 2016. Then It started a decline which lasted until 2018. Ever since the stock is attempting to expand again and has gained about 40% for a bit more than one year.
3. Apple (AAPL)
Apple is a multinational tech and retail company from the United States. It is one of the top manufacturers and retailers of tech products, as well as the biggest U.S. taxpayer.
It’s expansion has included:
- Plans to invest $1 billion to build a new campus
- Plans to expand to 600 locations worldwide until 2023
- Repair programs of old devices
We observe growth in Apple’s revenue in the last 3 years as well as in the net income. This speaks of an eventual trend in the company’s earnings. The price-to-earnings ration of the company is average at 14.28, not too low, not too high.
The beta of Apple at 1.11 speaks of a high benchmark correlation, which is normal having in mind that the company is in the top 10 of the S&P 500. But since the beta is higher than 1, this speaks of higher volatility.
Apple currently exists at approximately 500 locations around the globe. Their plan to expand with 100 more for only 4 years is an ambitious goal, as well as the plan of the new campus.
Things with Apple look similar to Amazon. The reason for this is that both companies are tech-oriented, meaning that they are subject to the same economic influence.
Apple’s corrections are bigger than Amazon’s, though. Another difference is that Apple hasn’t regained as much as Amazon since the drop at the end of 2018.
Where You Can Buy Retail Stocks
You can purchase each of these retail stocks from an online brokerage. These brokerages are fully compliant to the tough U.S. regulation and brokerage standards.
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Retail corporations have that type of stocks, which strongly depend on people’s ability to spend – this is how the stock market works for retail stocks.
The reason for this is that they target the end user. For this reason, it is always a good approach to research some economic indicators of the countries of residence of the company’s buyers. A good indicator is the consumer spendings in a country as well as the GDP per capita.
These indicators show how much people spend and how much money they earn per year. A drop in each of these could affect the performance of a retail company in the respective region.