By Teresa Rivas
For all the pressures on Americans' budgets, consumer spending remains strong. That is likely to continue, so there is reason to be more upbeat on retailers, which remain out of favor among many investors.
The SPDR S&P Retail exchange-traded fund has gained roughly 4.5% so far this year, while the S&P 500 has climbed nearly double that amount. That seems to reflect excessive pessimism about the industry, given how well consumer confidence readings have held up.
Veteran retail analyst Dana Telsey argued in Barron's last week that there are more reasons to feel positive rather than negative about consumers. And Stifel's latest survey of American consumers showed people aren't planning to pull back on their spending.
Mizuho analyst David Bellinger agrees. Late Monday, he began coverage of 15 consumer companies, "with an optimistic view for the balance of 2024." He thinks eight of those stocks -- AutoZone, Five Below, Home Depot, Lowe's, Mister Car Wash, O'Reilly Automotive, Valvoline, and Wayfair -- are Buys, given his expectation for "a more subdued, yet stable spending backdrop to become more apparent in the coming months."
He admits that American consumers are still under financial stress. Although the rate of inflation has declined, the cost of living is much higher than it was a few years ago, delinquencies on credit cards and cars loans are up, and inequality means that the benefits of a strong economy haven't been enjoyed by all.
Yet Bellinger sees consumers as "still engaged and willing to spend." His ratings assume a rather tepid retail environment, with low single-digit growth, down slightly from the past six months but still in positive territory. "The underpinnings of healthy employment and real wage growth support our view, despite the cumulative effect of inflation on purchasing power and more discretionary areas of spending," he wrote.
In addition, as Telsey and others have noted, any eventual interest-rate cuts by the Federal Reserve would benefit retailers by freeing up money for discretionary spending. Bellinger said that while his firm doesn't expect the Fed to cut rates soon, overall expectations that reductions are on the horizon could be a positive factor for retail stocks, particularly for home-improvement and furnishing companies like Home Depot, Lowe's, and Wayfair.
That gives him confidence that taking some risk in the retail sector will be rewarded. His three top picks are Lowe's, Mister Car Wash, and Wayfair.
He has a $280 price target on Lowe's, given its exposure to early improvement in the housing market and strong tailwinds for the company's operating margins. Lowe's stock was up 1.3% at $246.73 in early afternoon.
Bellinger called Mister Car Wash a "compelling multi-year growth opportunity moving past peak competitive pressure," with new subscriptions acting as a positive force for the stock. He thinks the price should rise to $11; it was at $7.42 on Tuesday.
Wayfair shares are worth $72, he wrote, saying that investors aren't giving the company enough credit for improved efficiency and the fact that it is quickly approaching mid-single-digit margins in terms of earnings before interest, taxes, depreciation, and amortization. The stock was at $61.25 in afternoon trading.
According to FactSet, roughly 50% of analysts rate Lowe's and Wayfair at Buy or the equivalent. Two-thirds are bullish on Mister Car Wash.
Finally, it is important to note that despite the wild swings in consumer spending in recent years -- with everyone first shopping online during the pandemic and then shifting toward experiences over things -- it appears that conditions are finally returning to normal.
"Real personal consumption expenditures on goods remain well-above the pre-2020 trend line without any indications of a sharp snap back on the horizon," Bellinger wrote. "Whereas, spending on services has moved upward at a faster pace and only recently returned to a more normalized runrate."
In other words, people are still buying more things than they did before Covid. So while not all companies are thriving in the new postpandemic normal, retailers appear to be in a better spot than many investors realize.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 19, 2024 14:34 ET (18:34 GMT)
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