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What are we looking for?

U.S. retail stocks poised to grow amid a poor retail environment.

On July 14, the U.S. Census Bureau released its monthly retail trade report for June. The report showed that June sales contracted by 0.3 per cent, compared with a growth of 0.3 per cent projected by analysts. In light of a generally healthy U.S. economy, this report was a huge disappointment and the share prices of many retailers declined on the news.

The screen

We will be using Recognia Strategy Builder to search for U.S. retail stocks with reasonable valuations and strong earnings prospects for the coming year.

We begin by setting a minimum market cap threshold of $10-billion (U.S.).

Next, we will look for U.S. stocks with projected earnings-per-share growth rates (this year versus last year) of at least 10 per cent annually. In addition, to find companies that make efficient use of invested equity, we will look for a return on equity of 25 per cent or higher.

Finally, to ensure we don't overpay for our investments, we will set a threshold on trailing price-to-earnings ratio of less than 25.

More about Recognia

Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.

What did we find?

Best Buy Co. Inc. ranks No. 1 on our list and also has the lowest trailing P/E ratio of just 15.3. Since losing $1-billion and nearly going bankrupt in 2012, Best Buy has turned the ship around and is now profitable and growing earnings at a projected rate of 21.4 per cent.

The largest company on our list is Atlanta-based Home Depot Inc. with a market cap of almost $150-billion. Home Depot also has the highest return on equity on our list, showing its efficiency in turning invested capital into income.

The U.S. monthly retail trade report also showed that department stores lagged their retail peers with a decline in sales of 0.6 per cent in June. Macy's Inc. is a bright spot in the department-store landscape with the stock price up 28 per cent in the past 12 months.

Historical performance

Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 24.1-per-cent annualized return compared with 14.3 per cent for the S&P 500 index and 12 per cent for the Dow Jones industrial average.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.

Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.

U.S. retail stocks