The U.S. economy has been far more resilient than many thought. Certainly more than the economists who almost unanimously were calling for a recession about 18 months to two years ago; more than the Federal Reserve anticipated as they hiked interest rates from near zero to 5.5% in just 18 months; even more than the average American, what with consumer confidence still far lower now than in 2021 or in the three years that preceded the pandemic.
And yet, U.S. GDP growth remains healthy, with 2.8% growth in the third quarter, and retail sales have been solid, if unspectacular. They improved 0.4% in October and were revised upward to 0.8% growth in September – again, not exactly jaw-dropping growth, but two of the better-performing months in the last year (July was the best month, at 1.2% month-over-month growth). Plus, inflation has fallen definitively below 3%, or less than a third of its June 2022 peak above 9%.
Against that backdrop comes the start of another holiday shopping season, as Black Friday is just a week away. November and December are historically the two best months on the calendar for the stock market, and retail stocks typically get a nice bump from all the spending. With no recession in sight, and with prices not accelerating the way they were 18 months ago, this year should be no exception.
So far in 2024, however, retail stocks have underwhelmed. The SPDR S&P Retail ETF (XRT), the best proxy for the retail sector, is up a very modest 7.6% this year, versus a 23.7% gain in the S&P 500. (This week’s Target (TGT) earnings miss and subsequent stock selloff didn’t help matters.) But the XRT tends to perform better as shopping season picks up. From 2010-2019, i.e., the decade before Covid threw a wrench into holiday shopping plans, XRT averaged gains of 2.2% in the three months that followed Black Friday, and therefore included most retailers’ first-quarter earnings reports the ensuing January or February. But that trailed the 3.2% average return in the S&P 500 over that same span. So, there’s no edge in buying a whole bunch of retail stocks in the hopes of a Black Friday bump.
That said, certain retail stocks do get a market-beating bump every year. The problem is, it’s not the same one every year. Amazon (AMZN), for example, was up 29% in the three months that followed Black Friday in 2017. The next year, it was down 1.2% over the same period.
Macy’s (M), which is synonymous with Thanksgiving and Black Friday sales, was up 25.6% in 2014-15, but down 28.3% in 2015-16.
Conversely, Walmart (WMT) was down 4.1% in 2014-15 but up 11.5% in 2015-16.
You get the point. There’s no real consistency from year to year as to which retail stocks get the Black Friday bump. What is consistent is that the retail stocks that were catapulted after Black Friday were already advancing heading into Thanksgiving.
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3 Retail Stocks for Black Friday
Retail Stock #1: Home Depot (HD)
The Fed is finally cutting rates. So far, that hasn’t put much of a dent in mortgage rates, which are still hovering near 7%. But eventually, it will, as the Fed’s rate-cutting program is just underway. Lower mortgage rates mean more people buying homes … and more people wanting to buy home improvement wares to spruce up the new place. That bodes well for Home Depot, whose share price is already up nearly 6% in the two months since the Fed started slashing rates. And last week’s earnings results only helped matters.
Sales improved 6% year over year, prompting the company to raise full-year revenue guidance to 4% growth from a previous range of 2.5% to 3.5% growth. While comparable-store sales declined 1.3% in Q3, that was better than the 3.3% drop analysts had anticipated. Overall sales and earnings also topped estimates, albeit narrowly. Chief Financial Officer Richard McPhail cited a lot of “pent-up demand for projects,” but that consumers are “putting it on hold until they see a more favorable financing environment.”
That environment is coming. So perhaps Black Friday shopping deals will help Home Depot achieve another better-than-expected quarter as customers look to a brighter, less costly 2025 for homeowners.
Retail Stock #2: Chipotle Mexican Grille (CMG)
Chipotle has re-earned Americans’ trust since its infamous 2015 E. coli outbreaks. The Mexican fast-casual chain just opened its 1,000th restaurant (in Kansas City), and – aside from 2020 (Covid) – the company has churned out double-digit sales growth every year since 2017, and revenues have more than doubled (from $4.5 billion to $9.9 billion) during that time. This year, analysts anticipate another 14.6% growth, with sales rising to $11.3 billion, with 13.2% growth next year. In the restaurant industry, Chipotle is as reliable as it comes. And investors have taken notice.
CMG shares are up 31% year to date and, after a big drawdown in July along with the market, have rebounded from 45 to nearly 60 as of this writing. That’s still well shy of the stock’s June highs above 68. But the momentum is there, and with another strong quarter expected, there’s no reason to expect another slowdown anytime soon.
Retail Stock #3: Dick’s Sporting Goods (DKS)
Dick’s was one of the more resilient retailers during the pandemic, with shoppers pivoting from team sport jerseys, gloves, helmets and balls to individual activity apparel like running and hiking gear, camping accessories, golf clubs, tennis rackets, hunting equipment, etc. Dick’s has something for everyone, which is why it never stopped growing during Covid. Now that kids’ team sports are back in full swing, it’s thriving like never before. Sales have ballooned from the $7-$8 billion-a-year range before and during Covid (2017-2020) to $13 billion now. And though top-line growth has slowed, bottom-line growth is accelerating, with analysts anticipating EPS growth north of 7% both this year and next.
DKS shares have pulled back a bit lately for no good reason. But with earnings due out next Tuesday (November 26), they could be due for a nice jolt. You could nibble now or wait until after the earnings report. Either way, in the big picture, the stock has momentum, up more than 33% year to date, and yet it’s cheap, trading at 13x earnings estimates. Down 18% from its August highs, this could be an ideal entry point.
Bottom Line
I believe in trends and charts, and all three of the aforementioned retail stocks look very good.
Add one or all of them to your Black Friday shopping cart. But all of them are doing just fine even without the year’s biggest shopping weekend.
If you want to learn what other momentum stocks we’re recommending as the holidays approach, you can get yourself the gift of a subscription to Cabot Stock of the Week. In it, you’ll find strong momentum stocks to buy now.
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*This post is periodically updated to reflect market conditions.
